Mortgage Affordability in Major Canadian Cities: How Much Income Do You Need?

Mortgage Affordability in Major Canadian Cities: How Much Income Do You Need?
DATE
June 20, 2024
READING TIME
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The dream of homeownership in Canada continues to face challenges, with affordability worsening in most major cities despite a long-awaited rate cut from the Bank of Canada. This article dives into the details using May 2024 real estate data to explore how much income you'd need to qualify for a mortgage in different regions.

The Affordability Squeeze

According to Ratehub.ca's latest monthly affordability report, qualifying for a mortgage became more difficult in 11 out of 13 major housing markets between April and May 2024. This highlights the ongoing struggle for many Canadians seeking to enter the housing market.

Cities Facing Increased Affordability Challenges

  • Hamilton: A popular choice for its affordability compared to neighboring cities, Hamilton saw average home prices rise by $9,400 to $868,300 in May [1]. This jump translates to a $1,550 increase in the minimum income required to qualify for a mortgage, reaching $171,100.
  • Victoria: This relatively small market experienced a significant price increase of $7,600, pushing the average home price to $874,300 [1]. As a result, homebuyers now need a minimum income of $172,180, a rise of $1,230 compared to April.
  • Ottawa: Though still considered affordable with an average home price of $651,300, Ottawa's stable spring market led to a $6,500 price increase [1]. This translates to a $1,060 bump in the minimum income needed to qualify for a mortgage, reaching $132,060.
  • Calgary: Even Calgary's modest increase of $6,200 in average home prices to $587,100 impacted affordability. The minimum qualifying income now sits at $120,520, reflecting a $1,020 increase.

Cities with a Glimpse of Hope

  • Halifax: This east coast city defied the trend with a slight improvement in affordability. A decrease of $11,000 in the average home price to $539,200 lowered the minimum income requirement by $2,070 to $111,890.
  • Toronto: Canada's priciest market also saw a surprising turn. A cooler spring selling season, with sales down 22% year-over-year, led to a decrease in average home prices by $5,900. This resulted in a welcome reduction of $1,250 in the minimum income needed to qualify for a mortgage, bringing it down to $215,920 [1].

Factors Affecting Affordability

While stagnant interest rates played a role, the primary driver behind the affordability decline in most cities was a short-term rise in home prices. The Canadian Real Estate Association (CREA) reported a 4% year-over-year decrease in the national average home price to $699,117. However, some regions, particularly those with home prices below $1 million, experienced month-over-month price increases.

The Mortgage Stress Test

It's important to remember that qualifying for a mortgage goes beyond just income. The mortgage stress test, mandated by the Government of Canada, requires borrowers to prove they can afford a mortgage payment at a rate 2% higher than the one they qualify for. This additional buffer is meant to ensure borrowers can withstand potential future interest rate hikes. The May 2024 report considers an average five-year fixed mortgage rate of 5.49%, resulting in a mortgage stress test rate of 7.49%.

Impact of Recent Rate Cut

The Bank of Canada's rate cut on June 5, 2024, is expected to improve affordability in the coming months. The cut from 5% to 4.75% will directly impact variable-rate mortgages, leading to immediate reductions in monthly payments for existing holders [1]. Fixed-rate mortgages are also anticipated to decrease as the bond yield, which lenders use as a benchmark for pricing, has already shown a favorable response to the rate cut [1].

Market Outlook

Market analysts predict several more rate cuts from the Bank of Canada in the coming months, creating a dynamic environment for mortgage rates. This fluidity underscores the importance of seeking guidance from a mortgage professional like a broker at Coldwell Banker Horizon Realty [4]. They can provide a comprehensive analysis of your financial situation, current mortgage offerings, and the ever-changing market landscape. Here's how a mortgage professional can assist you:

  • Personalized Affordability Assessment: They can consider your income, down payment, existing debts, and credit score to determine the maximum mortgage amount you can qualify for and the most suitable mortgage product based on your needs and goals.
  • Navigating Rate Options: With expertise in both fixed and variable rate mortgages, they can help you understand the pros and cons of each option in the current market climate and guide you towards the most fitting choice for your financial circumstances and risk tolerance.
  • Pre-Approval Advantage:  Obtaining pre-approval strengthens your offer in a competitive market by demonstrating your financial capability to potential sellers.  Your mortgage professional can guide you through the pre-approval process and ensure all necessary documentation is prepared.
  • Streamlined Mortgage Application:  The application process can be complex and involve gathering various documents. A mortgage professional can handle much of the paperwork on your behalf, saving you time and ensuring a smooth experience.
  • Negotiation Expertise:  They can advocate for you during negotiations with lenders, potentially securing a more favorable interest rate or terms on your mortgage.

Conclusion

While affordability remains a challenge for many Canadians seeking to enter the housing market, the recent rate cut and potential future cuts offer a glimmer of hope. By understanding the factors affecting affordability, the role of the mortgage stress test, and the impact of recent rate changes, you can make informed decisions.

Sources:

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