Minimum income needed to buy a Canadian home lowered in July

Buying a home in Canada became slightly easier in July, according to a new report that cites dropping mortgage rates and lowering average home prices.

The minimum income required to purchase a home dipped last month across the 13 major cities studied by Ratehub.ca, according to their recent blog post.

Based on average home prices in each area, average mortgage rates and the “stress test” required in Canada to qualify for a mortgage loan at a bank, Ratehub calculated the minimum income a buyer would need to qualify for a mortgage.

That salary threshold dropped by more than $5,000 in Canada’s two priciest markets of Toronto and Vancouver, and it was overall lower across the board.

One factor in the drop was average home prices, which went down month-over-month in Canada’s largest markets.

Another factor was decreasing mortgage rates, which lowered from an average of 5.47 per cent in June to 5.29 per cent in July, based on averages for five-year fixed rate mortgages from Canada’s five major banks. 

A lower mortgage rate means the mortgage “stress test” is easier to pass. The test uses a mortgage rate 2 per cent above the rate a buyer is getting from a lender (or 5.25 per cent, whichever is higher) to gauge whether the buyer can financially handle a jump in mortgage payments.

The test factors in home price, annual salary and other debts and expenses to come up with a ratio that is essentially total monthly debts compared to total monthly income.

The Financial Consumer Agency of Canada’s Mortgage Qualifier Tool can be used to calculate the “gross debt service” and “total debt service” based on property value, down payment, mortgage rates and debts.

Note: The tool above uses recommended ratios (32 per cent for gross debt service and 40 per cent for total debt dervice) as a guideline. Ratehub’s calculations used the Canada Mortgage and Housing Corporation’s highest allowable ratios (39 per cent and 44 per cent, respectively).