While Toronto real estate is no longer the hot seller’s market it has been in recent years, buying a home in the city today unfortunately isn’t any easier. As new economic factors influence Canada’s mortgage industry, the complete cost of homeownership is once again on the rise, leading many people to ask “how much do I really need to make in order to afford a home in Toronto?”.
Of course, homeownership is not a one-size-fits-all process. Each buyer has their own unique needs in a home and financial circumstances. However, by looking at new data points and market insights, you can help determine if you’re on the right financial path to homeownership.
Are you thinking about buying your first home? Explore these other resources from our blog.
- Buying For the First Time? Here’s What You Should Know
- How Will the Shifting Toronto Market Impact Buyers?
- A Buyer’s Guide to Bank Appraisals
Rising Interest Rates
Despite Toronto’s housing market cooling off over the past six months, buying a home in the city is once again becoming even more difficult for residents. Now, rather than rising costs of housing, the primary culprit for unaffordability is the costs of lending. Since the beginning of 2022, the Bank of Canada has steadily increased interest rates as a method of combating inflation. This initiative, which saw the bank’s target rate climb from 0.25% to 2.5%, has made home financing exceedingly expensive for Canadians.
So while today’s housing prices in Toronto are down compared to 2021, the complete cost of owning a home is going up.
Looking for a crash course on the recent Bank of Canada interest rate increases? Check out our blog post on the topic here.
The Stress Test
Homebuyers looking to secure financing will first need to take the mortgage stress test before they are approved. In the past, this test usually only applied to buyers who made a down payment short of 20%. Today, financial institutions apply the stress test regardless of lump sum savings.
In short, the mortgage stress test is designed to confirm whether or not buyers will be able to continue making payments should their interest rate rise. Under current lending guidelines, buyers need to pass one of two tests in order to qualify for a mortgage. The first test is a 5-year benchmark rate, which recently jumped from 5.25 to 7.21 in June. The second is a borrower’s approved lending rate plus 2 percentage points.
We know this is a lot of information to digest. If you want to learn more, read the Mortgage Stress Test Explained on our blog.
Key Data
As of August 2022, the average home price in Toronto is $1,204,900, with an average mortgage amount of $963,920. These numbers paired with current interest rates mean that along with a sizable down payment, anyone looking to buy a home in Toronto would need an annual income of $226,500. This number is a notable increase from just a few months ago. Since March, the average annual income required for buying a home in Toronto has jumped 7%, or about $15,750.
While these numbers offer a rough guideline, it’s important to remember that each homebuyer is unique. Based on your unique home wishlist and financial circumstances, homeownership may be in or out of the realm of possibility.
Need more information about securing financing for your home? Check out these blog posts.
- How to Find the Right Mortgage Lender
- What Not to do Once You Have a Mortgage Pre-Approval
- 5 Reasons to Obtain a Mortgage Pre-Approval
Your Home Wishlist
No two homebuyers are the same. A key determining factor in whether or not you can afford a home in 2022 is what kind of home you’re looking to buy. For instance, a pre-construction condo in Etobicoke will have a significantly different price tag than a detached home in Cabbagetown.
Like any questions about housing in Toronto, the best place to find an answer is by asking a real estate agent. They can assess your real estate needs and financial profile to offer a transparent and complete overview of your options.
Unsure if you can afford a home in Toronto? As expert local agents, we can help. Contact us today.
