The housing market in many cities across Canada continues to remain strong. In Toronto, we have recently seen some price slippage in detached or semi-attached homes but homeownership still remains out of reach for many.
As of June 2019 in Toronto, the average detached home price was $1,332.639 and the average price of a condo was $636,606. These numbers are astonishing and can make it particularly difficult for first-time homebuyers to get into the market. Being able to afford a home is not easy and many buyers are not able to come up with the down payment to purchase into the Toronto hot market. Unfortunately, home prices are not the only thing damping buyers’ ability to purchase a home, the 2018 spring introduction of the new mortgage rules and the introduction of the “stress test” has made it even tougher for buyers to get approved for a mortgage.
2018 Mortgage Rules Do not Help Buyers get into the Housing Market
Buyers now also need to deal with tighter mortgage rules which have made it more challenging getting approved for a mortgage. Prior to the new 2018 mortgage rules buying a home in Toronto was quite difficult given market prices but the new mortgage rules have made it even more challenging. Basically, borrowers will have to undergo a stress test to see if they would be able to handle a higher mortgage payment should interest rates go up in the future. The impact of the new rules has been quite significant and has potentially decreased affordability by up to 20%.
Getting into the housing market is definitely a challenge but it isn’t necessarily impossible. Buyers now need to get creative and think a little outside the box. Here are some tips and options on how to become a homeowner sooner.
Purchase a Home with the Potential to Rent
Purchasing a home with rental potential will help buyers get approved for a mortgage that they might otherwise not have been able to get approval for. If a portion of the home can be rented out, the lender may approve the financing if the home buyers can demonstrate that they can rent out a portion of the home to supplement the mortgage payments.
If you can find a home where there is a potential to divide up into multiple rental units or a basement that can easily be converted into a basement apartment this may help you get into homeownership sooner. The rent can be taken into consideration when getting qualified for a mortgage. This provides lenders with a sense of security against default as homeowners are getting support in paying their mortgage.
Rent-to-Own
Given today’s housing prices it can be quite difficult to come up with the down payment. Rent-to-own strategies are a great way to lockdown the purchase price for people who can’t come up with the down payment. Normally a “transaction fee” of a couple of thousand dollars is charged to secure the home. The transaction fee is typically much less compared to a down payment. This strategy allows the buyers to live in the home and pay rent plus a surcharge that will be used toward the down payment to ensure the tenant can qualify for the mortgage when the time comes to take over ownership of the home.
This option, allows the buyer to get into the housing market without having to save a huge amount of money for the down payment and gives them time to save up for the down payment.
Buy in One of the Top Investment Cities and Towns Outside of the City and Rent in the City
Buy in One of the Top Investment Cities and Towns Outside of the City and Rent in the City
Another viable option is to purchase a property in one of the top investment cities and towns such as Hamilton, Barrie, Kitchener, or Waterloo or even better invest and rent in Toronto. Toronto may not be financially accessible but these smaller towns and cities may be financially feasible.
Buyers can always purchase a much more affordable home in satellite cities and towns and endure the commute. But they may also choose to rent out that home and in turn become a tenant in the city. This way they can be within close proximity to work while still being able to get into the real estate market, collecting rent that helps pay down the mortgage and build equity in real estate.
Be sure to work with a seasoned real estate agent who will be able to point you to places where there is plenty of room for appreciation and tenant demand.
Buy a Fixer-Upper
Turn-key homes that have already been upgraded tend to command a higher dollar figure than homes that are in poor condition, for obvious reasons. But if you bought a home that was move-in ready and needed no work, you wouldn’t have much room to add some value to it yourself.
Instead, consider buying a fixer-upper, which should come with a much cheaper price tag. Not only would you be able to afford the home at a lower price, you’d also be able to quickly add equity by making the upgrades and improvements yourself. By investing a little sweat equity you can buy what you can afford and add value to it in a short period of time.
Final Thoughts
Getting into the Canadian real estate market these days is certainly a challenge. Housing prices are high and mortgage rules are tighter. But that doesn’t mean getting your foot in the door is impossible. There are steps you can take to make homeownership happen for you. Team up with an experienced real estate agent and mortgage broker to see what options are best suited for you.
