How to Afford a House in Toronto
Despite a pullback in Toronto home sales and prices as the Bank of Canada continues to raise interest rates, prices in Canada’s largest city remain sky high. Toronto real estate which has traditionally seen moderate, 5% year-over-year price growth, has seen prices nearly triple versus 10 years ago. At the end of 2012, you could buy a single family detached home for the average selling price of $429,000. Fast forward to 2022, that same home is valued at $1,204,900. Needless to say, this profound increase in price has made it more of a challenge for new buyers to come up with a down payment. New buyers in today's market often need to get creative, and those open minded to an outside the box solution can make their dream of owning a home in Toronto a reality. Here are some of the ways people are doing it today:
How to afford a house in Toronto
Here are 5 tested methods anyone can use to improve their chances to being able to afford a house in Toronto:
House hack. Like the great Robert Kyosaki says, your home isn't an asset if it takes money out of your pocket every month. House hacking is a way of reversing that dynamic and making your home a cash flowing asset. This is done by finding ways to make your home generate an income. The most common way is to buy a multi-unit residential home such as a single family home with a basement apartment or a duplex, and then rent out the more desirable of the two spaces. Maybe you can find a property that also has a shed that can be rented to a local business owner such as a mechanic, or you can rent out storage space in your garage.
House hacking works because generates additional income for you every month that will help you to get approved for a larger mortgage, and ideally it provides enough cash flow to cover you mortgage and some of your other home expenses (utilities, property tax, insurance, etc.). If you manage to break even every month, you're essentially living in your home for free.
Get a roommate. If you're looking to live in a smaller space that doesn't have a separate living quarters, you can still leverage the house hacking concept by renting out a room to a roommate. If you don't mind living with someone else, you can generate an additional income that will help your chances of approval when applying for financing, and ultimately helps to making buying a home more feasible. When searching for a roommate, be sure to conduct background checks, credit checks and always ask for three references you can call. At least one of the references should be a former landlord or roommate.
Buy in another city first to build equity. As the old adage goes, “don't wait to buy real estate, buy real estate and wait”. A lot of young buyers who want to live in Toronto or the GTA get discouraged by the high price tag and as a result fail to dive into their real estate purchase home purchase. But your first real estate purchase doesn't necessarily need to be your first home. There are plenty of cities in Ontario that are relatively affordable compared to Toronto and offer wonderful opportunity to build equity and benefit from real estate ownership. Windsor, Sarnia, London and Chatham are all growing cities that have gained considerable popularity in recent years due to the rising price of Toronto real estate and the growing work-from-home trend.
I know of an acquaintance who couldn't afford his dream condo in Toronto, so he bought a condo in London, Ontario instead for $180,000 which he rented out while he lived at home with his parents. After a few years of renting out the property and building equity while prices in the area increased, he sold the property for $320,000 and used his profits to buy in Toronto.
The most important thing is getting into the market. It may not be your ideal area at first, but as long as you're buying a solid house in a growing neighborhood and the numbers make sense to you, you're going to be buying an appreciating asset which will grow equity, eventually allowing you build a down payment to buy the home that you really want. Think of it as a stepping stone. Real estate investment isn't that different from Monopoly – sometimes you have to buy Baltic Ave before you can get Park Place.
Vendor Take Back Mortgage. You may be surprised to find out that you can buy real estate with very little money down. A vendor take back mortgage is a form of creative financing in which the the seller of a property acts as the lender, and often will accept 5-10% of the purchase price as a down payment. The buyer then takes ownership of the property and makes regular monthly payments directly to the seller.
The VTB is popular strategy among real estate investors who are short on liquid cash but eager to jump into the market. Vendor take back mortgages benefit sellers who are looking for a steady, long-term income as opposed to a lump sum of cash.
Buy pre-construction. The flexible deposit structures offered by most pre-construction home projects in Toronto allow purchasers the ability to pay their down payment in several installments as the project is built. Typically, the builder will require only $2500 to $5000 as an initial deposit upon signing the deal, and the final deposit payment (usually 5%) isn't due until occupancy closing, which often times is 2-5 years after the agreement is signed. This affords purchasers an opportunity to save up their down payment while benefitting from growth in the market as their asset appreciates.
To learn more about the unique benefits of buying pre-construction, check out our article here. We have also have comprehensive guide on Brighter Day that explains step-by-step the best way to buy a pre-construction home anywhere in Ontario, and how to gain maximum benefit from your investment in the process.
Click the link below to find out how we can help you buy your dream home in Toronto.
How can I buy a house in Toronto with no money?
There are many young professionals and couples in Toronto who make great incomes but are unable to buy their first property because they have not had enough time to save up for a down payment. Some lenders offer first time home buyers an excellent product called down payment financing which allows them to borrow their down payment for a home at a competitive rate. Let's assume you need $30,000 to put 5% down on your first home. At an interest rate of prime plus 0.5% (let’s use 3.2%), you would pay $145 per month to finance the down payment in addition to your regular monthly mortgage payments.
Another option is borrowing from your RRSP. If you happen to have money saved up in your RRSP, first time home buyers can borrow up to $25,000 (or $50,000 per couple) from their RRSP to put a down payment on a home. As long as this money is paid back in 15 years it is completely non-taxable. As you build equity in your home, you can re-finance your mortgage to pay this money back before you are taxed on it.
How much do you need to save to buy a house in Toronto?
If you’re a first time home buyer looking for a condo in Toronto, considering the 5% down requirement you would need to save up $34,340 as a down payment (plus $13,740 in closing costs) considering the June 2022 average selling price of $687,000. As this article is being written, there are older condo units for sale in solid Toronto neighborhoods being offered in the 500,000’s which means first time buyers can get into the market with a down payment as low as $25-30,000. First time buyers looking for a detached home in Toronto will need to put up a bit more cash ($67,500 plus $27,000 in closing costs) given the larger average price tag of $1,350,000. Non-first time buyers needing to put down the full 20% down payment can expect to require $137,400 down on a Toronto condo and $270,000 down on a detached home.
House hacking is a great way to afford a house in Toronto and the GTA. This resource is a great step-by-step guide on how to get started:
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