Don’t Put Your Homebuying Dreams on Hold
The Best Time to Buy May Be Now
Toronto homebuyers often believe that the best approach to entering the market is to take the extra time to save for a larger down payment in order to reduce their monthly mortgage payment. Unfortunately, given the dynamics of the Toronto real estate market, this thoughtful approach can often cost them their dream home.
Let’s consider an example where a buyer is pre-qualified to purchase a house or condo in the $750,000 price range. They have currently saved $50,000, enough for the minimum down payment, but hope to save an additional $12,000 over the next year so they can reduce their mortgage payments.
…GREAT IDEA RIGHT?
The challenge: One year later, the same $750,000 house or condo they were looking at now costs $810,000 (based on the 10-year average annual price growth of Toronto Real Estate Board – all TREB region properties).
Despite their additional $12,000 in savings, not only would their mortgage payments and closing costs be much higher, they may no longer even qualify to buy their target home.
Why your Buying Power Erodes in the Toronto Market
1. Steady Increase in Home Prices
Toronto house prices have steadily climbed. On a compound annual growth rate basis, Toronto properties (all TREB regions) have grown 8.6% per year over the past five years, 7.6% per year over the past 10 years, and +6.7%* per year over the past 20 years. There are market blips you read about in the media, reflective of short-term volatility that occur in any market. But, if you step back and look at the longer-term picture, the growth in Toronto real estate prices has been very consistent.
To put that in perspective, a home priced at $750,000 could have increased to almost $800,000 just one year later.
2. Changing Lending Guidelines
Canadian lending guidelines have changed significantly since 2010. While the long-term goal of these changes is to strengthen the real estate market, unfortunately each change can have a dramatic and immediate impact on your affordability. One such change is the Benchmark Qualifying Rate which was implemented on April 19, 2010 and further restricted on October 17, 2016.
While the long-term goal of these changes is to strengthen the real estate market, unfortunately each change can have a dramatic and immediate impact on your affordability
This simple change had a dramatic impact requiring that a buyer must qualify at a higher interest rate than their actual mortgage rate. For example, $750,000 in buying power on Oct 16, 2016 would have dropped to $630,000 literally overnight.
3. Rising Interest Rates
After a seven-year period of flat interest rates, the Bank of Canada started increasing its overnight lending rates in mid-2017, which directly impacts Lenders’ Prime Rates and Mortgage Rates. In fact, the Bank of Canada has already increased its overnight lending rate by 1.25% since July 2017, and many economists anticipate another 0.50% to 1.00% of increases by the end of 2019. Simply put, if you are pre-qualified for $750,000 today and rates go up by 0.25% tomorrow, your buying power would drop to approximately $735,000. If rates were to increase by 0.75% over a longer term, your buying power would drop to approximately $705,000.
Simply put, if you are pre-qualified for $750,000 today and rates go up by 0.25% tomorrow, your buying power would drop to approximately $735,000
Buyer Power Today vs. Waiting
Overall, while it may seem like a good strategy to sit on the sidelines and wait for the perfect time to buy, given the dynamics of the Toronto market, this strategy has often cost people their dream home.
JOANNA LANG has deep roots in Toronto and is a mortgage agent, mother of three, and co-founder of OutlineFinancial (www.outline.ca), one of the top-rated mortgage and insurance companies in Canada.
JENNIFER GREENBERG is a broker with Royal LePage Real Estate Sales Services, a mom and an active supporter of the St. Clair West Community.
*Figures are based on historical Toronto Real Estate Board data through October 2018
*Past performance may not be reflective of future results. For illustrative purposes only.