2023 Is The Year For First Time Homebuyers In Toronto (And How To Lower Expenses By Renting Out Part Of Home)
Home ownership in Toronto became a lot less attainable since we experienced the huge COVID upswing in prices. Now that prices are cooling off and apparently we’re officially crashing, home ownership might finally be more attainable for the right type of buyer in 2023.
If you want to what’s changing these days, stay tuned because I’ll be discussing this coming right up.
Barriers To Home Ownership
The most typical down payment on a home is 20%. But if you buy a property that’s under $1 million, you have the option to go with a lower down payment with a CMHC mortgage. The first $500,000 needs a 5% downpayment, and the next $500,000 needs a 10 percent downpayment. So for a house that’s $999,999, you need a lower 7.5% down plus closing costs, which total around $110,000, if you can get a mortgage for the rest.
But with average home price at $1.3 million in Toronto at peak in 2022, this lower downpayment was just not an option. For a $1.3 million home, you’d need a 20 percent downpayment, which is almost triple the capital requirement at $306,000. And that becomes a massive barrier to entry for buying anything besides a condo in Toronto.
Now that prices have come down a lot and might still have more room to go, the barrier to entry has opened up. With 416 semis going back to 2020 levels and one third of them now being under $1 million, the people who couldn’t buy for most of 2021 and 2022 finally have a better chance to buy because they can now qualify for a lower down payment percentage which is the biggest game changer this year.
Monthly Mortgage Payments Barrier
The second top barrier to entry for home ownerships is high monthly mortgage payments. You might think payments are much higher now because interest rates are much higher, but that assumption is if the price stays the same. The thing is that homes like 416 semis have dropped 25% from their peak, so the story is different.
The mortgage on a $825,000 semi before the pandemic would have been around $3,050 per month. At the peak with record low rates, it was at $3,150 per month. Now that prices have come back down to 2020 levels but rates have gone up, the monthly payment is now around $3,500 per month. It’s gone higher, but not as much as you might think.
Now if you buy a house and rent out part of it, you benefit from both lower prices and higher rents and both of these are big advantages that will make carrying costs much lower for you even when interest rates are high. If you live upstairs and rent the basement out, basement rents have come up around $200, so you’re looking at when closer outgoing cash flows compared to the peak.
Living in the basement and renting the upstairs out is probably the ideal situation because get a bigger rental income portion on the house. Upper unit rents have gone up around $400, and so monthly cash flows end up similar to pre-pandemic in this case.
You might also have heard about the government pushing for more gentle density in low-rise homes and this can improve your outgoing cash flows more. For example, later down the road if you end up, converting the upper unit into two separate units, you might see another few hundred dollars bump in rental income, which can further bring down your monthly outgoing cash flow.
Qualifying For A Mortgage Barrier
Even if property prices come down and you need a smaller mortgage for a new purchase, what happens is that those who are on existing variable debt will find it much harder to qualify for new mortgages because their carrying costs are now much higher.
On the flip side, those who aren’t as affected are those who don’t have any existing debt. And those who don’t have existing debt and plan on renting out part of their house will be in the best position because that extra rental income will improving their debt-to-income ratios more, and help them qualify for bigger mortgages.
The Best Type Of Buyer For 2023
So as you can see, there’s a lot of signs that 2023 will be the year for an increase in new home owners once the price is right because those who have been priced out since 2020 are finally able to buy again. And those who are willing to rent out part of the house they live in will benefit even more, with lower monthly payments and improved mortgage qualifications.
Keep in mind that there are other advantages to owning your own home over renting, like long term appreciation over time, and part of the mortgage payments each month goes towards owning more equity. It also means capital gains tax savings which is the big advantage of investing in your own home instead of parking your money in other investments like stocks or pure rental properties.
if this is something that might be in your 2023 plans and you want to talk to a real estate expert to see if it’s actually possible, just reach out to our team.
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