Saving for a down payment is not the only barrier to housing affordability

Discourse about homebuying affordability often focuses on saving up for a down payment - which, of course, is a major, time-consuming endeavour. (It took me 10 years, and I was buying at 2012 preconstruction prices!)

 

But another important consideration is how much mortgage you quality for based on your income. A 20% down payment is insufficient if the mortgage you qualify for is less than 80% of the purchase price.

 

An example of this fallacy is this recent Toronto Star article about "starter home" affordability.

Toronto in 2021

Time to save for down payment: 20+ years

What is Toronto’s starter home of this decade? In short, it’s further from the core, harder to attain and requires decades’ worth of savings.

Looking at properties that fell around 20 per cent below the average cost in 2021, there were still some bungalows in the mix, such as a raised bungalow that hit the market in the Scarborough neighbourhood of Birchcliffe-Cliffside. A property listing describes the house’s interiors as “well maintained but dated.”

It was offered in as-is, where-is condition, meaning the seller wouldn’t be making any repairs for the new buyer. “Buy to renovate or rebuild,” it suggested.

Like so many properties across Toronto last year, it sold for well above its listing price. Four days after records show it was listed for $699,900, it went for nearly $200,000 more, with a sale price of $875,000.

To reach a 20 per cent down payment, an individual or family would be tasked with tucking away a whopping $175,000. The median household income across the city last year was $84,000 — meaning this “starter” home would take more than 20 years of savings.

This is all true, but let's also look at the mortgage situation.

Median household income last year was $84,000.

Using Tangerine's "How much can I borrow?" calculator (because that's the one I find most user-friendly), with an income of $84,000, the $175,000 down payment calculated above, and all the other settings left to default, we get a total mortgage of $432,946.

 

$432,946 mortgage + $175,000 down payment = $607,946

$875,000 sale price - $607,946 = $267,054

$267,054 / $8,400 annual savings rate = 31.7921428571

 

So it would take an additional almost 32 years, on top of the 20 years calculated by the Star article, to save up enough of a down payment to fill in the gap between mortgage eligibility and sale price. That is a total of 52 years of saving up to buy your first home!

 

Alternatively, to qualify for a mortgage that would fill the $607,946 gap between the $175,000 down payment and the $875,000 sale price, you'd need an annual household income of $116,080 - 38% higher than the median. (I arrived at this number by fiddling with the inputs in the mortgage calculator. If you know a link to a calculator that determines the income needed to qualify for a given size of mortgage - or if you know the formula for calculating this - drop it in the comments so everyone can run the numbers themselves!)

 

So yes, saving up for a 20% down payment in an over-inflated housing market is a major challenge!

 

But it is not the entirety of the challenge. The average household would still be nowhere near able to afford a "starter home" with just a 20% down payment.

 

Discourse surrounding the challenges of the housing market needs to make it clear that a 20% down payment is not the only barrier to affordability.