| What it takes to get into home ownership these days (Part 1) |
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“I make $80,000 a year and you’re telling me I can’t qualify for a single family home?”
“No sir, not in the Fraser Valley—unless maybe in Hope, if you want to live there.
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“$80,000 would qualify you for a small condo in Surrey or Langley, a larger condo in Abbotsford, perhaps a townhouse in Chilliwack, if you’re not too fussy. But it will not qualify you for the 4-bedroom home on a large property that you are looking for.”
“I’m stunned!”
That’s the conversation I too often have to have with people who apply for our rent 2 own program.
It’s the reality of today’s housing market in the Lower Mainland and Fraser Valley, and why we’re reaching out into Merritt, Kamloops, Salmon Arm and the Cariboo.
It’s the result of housing prices growing much faster than incomes, driven mainly by external, but also internal, forces to the region.
It’s the result of new mortgage policies by the federal government and the banks over the past two years, making it much tougher to qualify for a mortgage.
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| So, what is the new reality? What are the requirements to get into home ownership? |
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| Well, first of all, you will normally need 10% available for a down payment. The days of 0% down are history and, while 5% down is still possible, you need to be a “gold star candidate” to get that. Gold star candidates are not usually applying to our program. |
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| So, let’s assume 10% down for the rest of this analysis. |
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Your qualifying property value limit is based largely on two things, the “gross debt service” ratio of your mortgage and the interest rate that drives that. “Gross debt service” means your combined monthly payment to cover your mortgage principle and interest, your property taxes, and an amount for utilities (usually $100). If the property you are buying is a strata property, then half the strata fee is also included in the GDS ratio. By federal law, that amount cannot exceed 39% of your gross monthly income. But, to be cautious, lenders may lower that by a few percentage points if you are not the aforementioned gold star prospect.
The higher the interest rate, the higher will be your monthly payment to cover mortgage interest, so the higher the income you will need to cover an equivalent property value. Or, to view it the other way, the higher the interest rate, the lower the mortgage (and hence, the property value) needs to be to stay under the 39% limit. Rising interest rates in the past year have thus lowered the value of property you will qualify for.
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| There are two other complicating factors. Do you have other debts that require monthly payments? You’re allowed another 5% of your gross monthly income to cover those. If they amount to more than 5%, though, then they reduce the maximum gross debt service ratio by the equivalent amount. (So, for example, if they amount to 11% of your monthly income, then your GDS ratio comes down by the 6% that you are over-committed on your other debts.Furthermore, the government has declared that you need to qualify for an interest payment at the “posted 5-year rate” or 2 percentage points higher than your “contract rate”. That means that, even if you get a 3.29% mortgage, you will still need to qualify as though the rate were 5.29%. This wipes about 20% off the value of a home that you could otherwise afford. |
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| Taking all these factors into account, we’ve calculated that we can qualify you for a property that is roughly 4.25 times the value of your gross annual income. |
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That’s still higher than the historic rule-of-thumb, which was 3.5 times. But, back then, you could find single family homes for 3.5 times your gross annual income.
In today’s world, the $80,000 income would therefore qualify the above would-be client for a property worth about $340,000.
If you’re doing the math in your head and thinking I need an income of $150,000 a year to get a single family home anywhere west of Abbotsford? That’s outrageous!, I can only say, “Yup, you’re right! I sympathize with you.”
It’s why so many people are looking to head out of the Lower Mainland and into the interior.
It’s the reason why Fraser Valley Rent 2 Own is assisting them.
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