In Canada’s heated housing market, there are a lot of people who are wanting to buy a home before they become ‘priced out’. There are a lot of people who buy a home that exceeds the recommended budget for their home and are basically house poor…they are spending more than 32% of their income on shelter. If you are looking for ahome to buy, don’t be a Gumby.
Remember Gumby? The green claymation character? He could stretch himself out. He could stretch himself really thin and still bounce back and resume his original shape. However, humans are not made like that and being stretched out on your monthly expenses is detrimental to your mental health and your financial health. Just like post-pregnancy, we don’t go back to our original shape unlike Gumby (haha!).
home buying minimums
There are some home buying minimum numbers that should be met if you are to qualify to purchase a home. Although these are minimums, I think it’s best to exceed them as much as you can.
According to Get Smarter about Money the recommended down payment is at least 20%. If your down payment is less than 20% you will have to pay additional CMHC (Canadian Mortgage and Housing Corporation) insurance because it is considered a high ratio mortgage. The absolute minimum is 5% (unfortunately! In my opinion, the bank owning 95% of your home does not mean you own a home!) up to $500,000. After $500,000, you will have to pay 10% of the balance in excess of $500,000.
For 2018, the Office of the Superintendent of Financial Institutions (OSFI) set out new mortgage rules, and forces lenders (aka the big banks) to make sure the mortgage applicant passes a stress rest before approving the mortgage.
The stress test is as follows (and the option that has the higher rate will be used for the calculations):
- 2 percentage points higher than the lender’s highest rate
- The potential mortgage will have to be calculated with the five year average posted rate (which is 5.14% as of writing per Bank of Canada)
In addition to the above, borrowers cannot exceed a 44% Total Debt Ratio (TDS) (this means that all debt, including car loans, credit card loans, any loans). Potential borrowers will also be required to spend less than 32% of their income on total housing costs, including utilities, property taxes etc.
spend less than 32% on your monthly housing costs
I found an affordability widget on RateHub that allows you to calculate the affordability of your intended home purchase including upfront expenses and ongoing carrying costs. It is very detailed and you can even add in condo fees, cable, Internet, phone, home insurance (home insurance in Vancouver) etc. It even shows the amortization schedule and the land transfer tax for your province. Super detailed and I am impressed!
Although the max affordability is 32% of your gross income, I think if you don’t want to feel stretched you should aim for housing carrying cost spending that is much lower.
People want to see what they can ‘max qualify’ for but they don’t realize what their lifestyle might be like if they are maxed out. A house poor lifestyle is not fun. It means less balance. Even if the home costs so much of your salary, inflation WILL happen, things will get more expensive, like groceries, meanwhile salaries may not increase at the same pace.
This should definitely be kept in mind if you are getting a mortgage quote online, for example.
I bought a home with my ex a few years ago, and even though it was less than 32% of my ex and I’s gross income (well, until I went back to school and then it became much more than 32% for me) I felt stretched. There were property taxes, repairs, and the utilities. The heating bill was so much higher than estimated (it was around $300-500 for two months over winter). Even though we had a mortgage helper (tenants in the basement suite, not a laneway house), I felt pretty Gumby-ish.
I wasn’t being a very good Canadian personal finance ‘expert’.
It didn’t feel good knowing that we owed so much money (over $600,000) without being able to pay it off easily. Oftentimes, I would worry about what would happen if one of us lost our job and wasn’t able to make the monthly payments. During that time, my ex did lose his job… he was able to make his monthly payments until he found a new job after a few months, but it was worrisome indeed. I would also worry what would happen if one of us croaked, or was on disability. A lot of thoughts went through my head, and if I recall correctly, it was even a variable rate mortgage too! Worrying about the next rate increase usually happened on my behalf when waiting for the Bank of Canada announcement. I am indeed a worry-wart. In addition to blogging, worrying is a great hobby of mine.
We had mortgage insurance which was a mistake.
After that relationship went sour, thankfully that was the start of the market increase and we were able to sell for some profit. With that I used the money towards my next home for myself while I hoped to meet a compatible life partner. With the rest of the money from the home sale, I used it to invest. When looking for the next home, I was thinking of getting a duplex, but it would mean being overstretched again. I ended up with a small one bedroom apartment, the mortgage payments, maintenance fees, home insurance, and utilities were manageable by myself. Of course I got a fixed rate mortgage which definitely helped my sanity. And I was able to make extra payments monthly and lump sum on my mortgage too. It felt much better than the first time around.
Although I would have definitely gained more home equity now if I had gotten the duplex, I am happy that I didn’t opt for that option as I wouldn’t have been able to travel or go out for meals with my friends, and probably wouldn’t have been able to even enjoy life.
If you want to get into the market but still want to enjoy life, addy allows you to real estate crowdfund in Canada for as little as $1.
Readers, was there ever a time where you felt like Gumby and felt overstretched?
GYM is a 30 something millennial interested in achieving financial freedom through disciplined saving, dividend and ETF investing, and living a minimalist lifestyle. Before you go, check out my recommendations page of financial tools I use to save and invest money. Don’t forget to subscribe for blog updates, a free dividend yield spreadsheet, and the free Young Money Bootcamp eCourse.