Stunned silence!
That’s what I sometimes get when I inform a rent-2-own applicant of the maximum property value they can qualify for.
They look at their neighbours in million-dollar homes and wonder why they only qualify for a $400,000 property.
Usually, the answer is that their neighbours have already owned the property for 15 years when they got it for $400,000.
“You mean I make a decent income (say $90,000), and I don’t qualify for a single-family home?”
Nope. You might qualify for a one-bedroom condo in Langley, or a larger condo or old townhouse in Chilliwack. If you’ll accept only a single-family home on that income, we can likely find you one in Williams Lake or Quesnel. Maybe Logan Lake.
So, how much of a property value does one qualify for?
First, let me clarify that the maximum property value that we can qualify you for is dictated by the lenders, who are, in turn, regulated by federal policies. We cannot exceed those amounts, or you will not qualify for a mortgage at the end of the rent-2-own program. (If we do exceed them, then we have set you up to fail and we would violate our professional and ethical responsibility to you. We’d be disciplined, and you’d lose your accumulated savings, making it a lose-lose proposition.)
The formula set out by the federal regulators is based on the proportion of your gross monthly income that you can allocate toward housing (i.e., mortgage payment, property taxes, an amount for “heat”, and half the strata fee if it is a strata property). This total number cannot exceed, in the best of circumstances, 39% of your gross monthly income.
The “best of circumstances” means you don’t have other loan payments (such as vehicle payments, credit card debt, etc.) exceeding 5% of that monthly income, and have a good credit rating. If you don’t fit into that “best” category, the percentage will be lower.
Of course, the mortgage payment depends on the size of the mortgage and on the interest rate. So, as interest rates rise, the maximum value of property that you will qualify for will decline, as the payment consumes more of your 39%.
OK, there’s one more complication. The feds, a few years ago, implemented a “stress test” that requires you to qualify for a mortgage two percentage points higher than the one you will be getting. This is to safeguard you should rates rise. I’d thought with the recent runup of rates, the stress test could be abandoned, but the government has not yet seen fit to do that, despite their lamentations about how housing has become unaffordable for many Canadians (Hello?? Earth to federal government . . .)
So how much home do you qualify for?
As mentioned, that depends on the size of your mortgage payment. But, crunching all the numbers, with a 10% down payment, it works out, currently, to about four times your gross annual income. So, if you want a home like that neighbour’s million-dollar home you covet, your (combined) gross annual income needs to be about $250,000.
For that $90,000 annual income mentioned above, you’ll qualify for about a $360,000 property. That means $36,000 down payment.
What if I have a larger down payment? I often get asked.
Yes, the larger down payment will qualify you for a higher-valued property, by the amount that the down payment exceeds the 10% requirement. But there is no multiplier effect on the down payment, as it does not increase your ability to make mortgage payments.
So, a $100,000 down payment instead of $36,000 will increase that $360,000 maximum property value to about $425,000. That might increase your Langley condo to a two-bedroom, or perhaps get you a 3-bedroom condo or nicer townhome in Chilliwack. But you won’t be able to move your single-family-home expectations from Williams Lake to Kamloops.
Is housing getting unaffordable? Unfortunately, for some it is. For most, they simply have to lower their expectations. Especially if they are not ready to purchase now but need a rent-2-own program for a few years before they get qualified.
I should note, too, that we will not consider doing rent 2 own on any properties valued beyond $1,000,000 and, realistically, our program works best well below that maximum number.
But there is some good news. There are plenty of condominium units in the Fraser Valley available within the budgets of middle-class income earners and, if you’re up-country, there are even modest houses still available within those budgets.
