Sold over asking, bidding war, multiple offers, over asking....These expressions are synonymous with Toronto's real estate. The latest RBC affordability index report came out in November 2013 which shows eroding affordability in the city:
- Bungalows: 55.6%
- 2 Storey: 63.7%
- Condos: 33.8%
What do these numbers mean? The affordability index is based on 25% downpayment at 5 year fixed mortgage rate amortized over 25 years. The percentages mean the following: To buy a bungalow, 55.6% of one's pre-tax income is required to cover the mortgage, property tax and utility costs. Assuming homeowner's tax bracket is 40%, this leaves 4.6% (100%-55.6%-40%) to cover the costs of food, transportation, entertainment, emergency and any child care costs. Clearly in Toronto, 2 incomes are required to afford detached and bungalow homes. On the other hand, condos continue to be affordable. Single income homeowner (100%-33.8%-40%) would have 26.2% of their income to cover living costs. This is one reason why the condo market continues to be stable in Toronto.
How To Get Into Toronto's Hot Real Estate Market
Yes, there is hope and options to get into the market. Here are some to consider:
30 & 35 Year Amortization Mortgages
For conventional mortgages (20% or more downpayment), 30 & 35 year amortization mortgages are available. Lower monthly payments would make the home more affordable, however planning for renewing into a higher interest rate environment is important. An extended amortization mortgage backed by the inflation hedge mortgage strategy is a sound financial approach.
Basement Rental Suite
Renting the basement has its pros and cons. Offsetting homeownership costs is a benefit and makes the home more affordable, however some aren't comfortable with someone living in the same house due to noise concerns and/or loss of space. Basement rental income can range from $750-$1400 depending on location and condition.
Combining both options is a possibility for frustrated homebuyers who are tired of losing bidding wars. To discuss your mortgage options and strategies, please contact Nawar.