“Today, buying real estate in the Montreal region requires a higher income than before,” notes Philippe Simard, Director of Mortgage Lending in Quebec at Ratehub. “And this is due not so much to rising housing prices as to higher interest rates. Ultimately, purchasing power is declining.”
Ratehub, a company specializing in mortgage brokerage and online comparison of loan offers, recently published a study on mortgage affordability in Canada’s 12 largest cities.
The report shows how changes in mortgage rates, stress tests, and real estate prices affect the required income level and the size of monthly payments to buy a home.
Housing affordability has worsened
According to Ratehub, housing affordability declined again in April.
In Montreal, the average monthly mortgage payment for a property priced at $594,400 was $3,043. The calculations are based on the MLS Home Price Index.
The study used the following parameters:
- down payment — 10%;
- amortization period — 25 years;
- annual municipal property tax — about $4,000;
- heating costs — $150 per month;
- interest rates from Canada’s five largest banks for March and April.
Buyers who put down only 5% and are required to pay an insurance premium through Canada Mortgage and Housing Corporation (CMHC) were not included in this study.
The impact of the stress test
In its calculations, Ratehub also took into account the federal stress test introduced by the Government of Canada in 2018.
To obtain or renew a mortgage, the lender must verify that the borrower can service the loan at a rate 2 percentage points higher than the one actually being offered.
For example, if the best five-year fixed rate on the market in mid-May was 4.04%, then for the stress test it is automatically increased to 6.04%.
Buying a condo as an alternative
“One good strategy for entering the real estate market remains buying a condo,” says Philippe Simard. “On the Island of Montreal, you can still find a well-maintained two-bedroom apartment priced from $350,000 to $450,000.”
Many buyers are also moving farther and farther from the city in search of more affordable housing.
However, this strategy has its limitations.
“More and more employers are requiring employees to return to the office, and maintaining a second car is very expensive,” Simard emphasizes.
Tips for future homebuyers
1. Consider a 30-year amortization
Today, first-time homebuyers can choose an amortization period of up to 30 years instead of the traditional 25 years.
This increases the total interest paid, but reduces the monthly burden.
For example, at a 5% rate, a 30-year mortgage will cost about $70,000 more in total borrowing costs than a 25-year mortgage. However, the monthly payment will be lower by about $192.
2. Delay the purchase to save a larger down payment
The larger the down payment, the smaller the loan amount and the lower the monthly payments.
3. Compare transportation and housing costs
If you are considering housing far from the city, calculate the real costs of a second car, fuel, insurance, and maintenance.
In some cases, a more expensive apartment or house near public transit may end up being a better deal than cheap housing in the suburbs with the need to use two cars every day.
Main takeaway
For Montreal residents, the main problem today is not so much high real estate prices as expensive mortgages and stress-test requirements. As a result, even with moderate price growth, many buyers have to earn significantly more than a few years ago to get approved for a mortgage.
