$362,654 in cash up front and an annual income of $213,149. That’s how much you would need to buy a detached house in Toronto. We wanted to do some analysis and find out what it would take to qualify for a mortgage to purchase a detached house in Toronto, so we did just that. We found that to purchase a detached house in Toronto, you would have to have:
- A minimum income of $213,149 to qualify for a mortgage
- About $362,654 in cash upfront for the minimum down payment and to cover closing costs
How we analyzed the data
We looked at the income you would need to meet the mortgage requirements set forth by the Canadian Mortgage and Housing Corporation (CMHC). The CMHC recommends that mortgage lenders ensure that no more than 35% of a borrower’s income goes towards housing costs that include mortgage payments, property taxes, and heating costs.
This metric of looking at your income, in comparison to your housing costs, is called the Gross Debt Service ratio (GDS). It is one of the two ratios lenders look at when they are evaluating a borrower’s ability to take on a mortgage. The other ratio is the Total Debt Service ratio (TDS). The TDS ratio also takes into consideration the borrower’s existing debt levels.
For our analysis, we’re going to be conservative and assume that the homebuyer has no other outstanding debts. So, the relevant metric would only be the Gross Debt Service ratio (GDS) for the purpose of our analysis.
The cost of a detached house in Toronto
For our analysis, the detached house being purchased is going to cost $1,523,770, which is the average price of a detached home in the City of Toronto as of June 2020, according to the Toronto Regional Real Estate Board.
The ranges in dethatched home prices can vary depending in where you look in the city. According to the Toronto Regional Real Estate Board, dethatched houses in Toronto’s central districts sell for about $2,307,355. Whereas detached homes in Toronto East go for about $1,119,216. In Toronto West they sell for $1,384,009.
The price you pay for a detached home in Toronto depends on which part of the city you’re buying. Buying a house with a lower price can reduce the costs since the initial down payment and income requirements would be lower.
To give a broader representation of what a homebuyer in Toronto could expect, we’re going to go with the average price of a detached house, which is $1,523,770.
Looking at your mortgage payments
The Government of Canada stipulates that if the purchase price of your home is $1 million or more, you are required to make a down payment of at least 20% of the purchase price.
Let’s take a look at the numbers for our detached house in Toronto:
- A 20% down payment on a home that costs $1,523,770 would come out to $304,754
- Since you’re making a down payment of more than 20%, you won’t need mortgage default insurance. We’re also going to assume you get a competitive 2.2% 5-year fixed-rate mortgage, with a 25-year amortization period.
- By putting 20% down on a $1,523,770 home purchase with a mortgage rate of 2.2% amortized over 25 years, your mortgage payment would come out to $5,280.34 a month.
- Keep in mind that your interest rate could change after the initial 5-year mortgage term finishes. Suppose the rate of interest goes up to 3% after the 5-year term. In that case, your mortgage payments would increase to over $5,700. This could tilt your GDS ratio against you and impact your ability to service your outstanding debts or switch mortgage lenders down the road.
Property taxes and other costs
As part of the GDS ratio, your mortgage lender will also look at the property tax and heating costs of your home purchase. The annual property tax rate in the City of Toronto is 0.599704%. On your home purchase of $1,523,770, and assuming the value of your home remains constant, you would have to pay $9,138.11 a year in property taxes. This works out to about $761.51 per month.
When applying for a mortgage, lenders will also take into consideration your potential heating costs for your home. The average heating cost for a detached house in Toronto runs about $175 a month, so we’ll use that figure in our analysis.
When you own a home, there are other costs that you should take into consideration. These costs include water, sewage management, garbage/recycling collection, and home insurance (which all together could add an additional $200 a month in expenses). While these costs are a part of a home’s upkeep and operation, mortgage lenders do not use these expense categories when calculating your debt service ratios. For our analysis, we’ll leave these costs out.
Your total monthly housing costs
Adding up your mortgage payments, property taxes, and heating costs, the total housing costs, for the GDS ratio, would come out to $6,216.85 per month.
This is the minimum cost that is expected, and the actual outflow may be significantly more depending on maintenance and other expenses that your house may incur. Homebuyers should take into consideration additional costs, such as water, sewage management, garbage/recycling collection, and home insurance when budgeting for a home purchase.
What income do you need to support $6,216.85 a month in housing costs?
Going back to our GDS ratio threshold of 35%, if you want to support $6,216.85/month in housing costs, you would need to be making $17,762.43 a month in income (pre-tax), which works out to $213,149 a year to qualify for a mortgage for a $1,523,770 house purchase.
Is everyone living in a detached house in Toronto making over $200k a year?
Not necessarily. Our analysis shows that if you were to buy a detached Toronto home today, you would need to be making over $200k a year in income to qualify for a mortgage. This sum is much higher than the average salary a person makes in the Toronto region.
Many homeowners are married couples who use their dual incomes to qualify for a mortgage. By using dual incomes, the income qualification burden would be reduced for each individual. If both incomes add up to the minimum $213,149 a year, you could qualify for a mortgage for the average detached house in Toronto.
Also, many detached homes were purchased when home prices were a lot more affordable in Toronto, so the homeowners may have been able to qualify for their mortgage with lower incomes and lower down payments.
Some homeowners also may use lenders who aren’t as strict with the GDS/TDS mortgage qualification guidelines. Often these mortgage lenders are smaller financial institutions that are not federally regulated. While these institutions are willing to lend more liberally, the rate of interest could be higher.
Let’s not forget about land transfer tax and other closing costs
If you buy residential real estate in Toronto, you are required to pay a one-time land transfer tax to the City of Toronto. In the case of a $1,523,770 purchase price, the land transfer tax would come out to $53,900. If you are a first-time homebuyer, you would pay $45,425 after applying first-time homebuyer rebates.
You’d also want to consider other closing costs such as lawyer’s fees, appraisal fees, home inspection fees, and title insurance, which could all add up to an additional $4,000.
So, your upfront cash outflow includes the down payment, along with the land transfer tax and other closing fees. Adding up all these together, the total cash you would need upfront, to purchase a detached house, comes out to $362,654.
Final thoughts and takeaways
Through this example, we have tried to estimate the necessary income and the upfront cash required to buy a detached house in Toronto. While our process is an effort to simplify the requirements to qualify for a mortgage, buyers should investigate their unique circumstances before making a decision.
For example, a buyer could have a job that may not be considered stable enough (i.e., being self-employed) by a lender to qualify for a mortgage. In such a case, lenders may require a higher proof of income to be eligible for a mortgage.
Some homes could also incur higher maintenance costs that could drive future expenses higher. We have also assumed that the buyer has no additional debt, which discounts the TDS limit set by mortgage regulators.
If you are buying a house as a full or partial investment property, there is also a provision for including rental income for calculating the debt ratios for mortgage qualification. Rental income is something we’ve omitted from our analysis. But, if you are receiving some sort of rental income from your house purchase, a mortgage lender may take that into consideration as well.
There’s a lot to consider when buying a house, especially in a pricey market like Toronto. Making $213,149 a year and having $362,654 in the bank serves as a benchmark to help understand the costs involved in buying a detached house in Toronto.