The Quickest Way to Get into the Market

Published on 17th July 2019

Trying to get into the market? Having a hard time? Let me tell you my secret to the quickest way to get in!

Running Rampant – This is a common issue that is running rampant in Toronto. Owning real estate has become a luxury at this point. Currently, the average cost of real estate is about 14 times that of the average gross income earned in Toronto. Yes, you heard me right, 14 times!! It has dramatically increased in the last 10 years. Back in 2009, the average price of real estate was just a bit shy of 6 times that of your gross income. Crazy how times have changed, not to mention the increased difficulty of getting a mortgage these days.

So if you’re on the outside looking in, then how do you get into this so-called “cool club” of owning Toronto real estate?

Part Unknown, Part Stigma – Well the answer is actually quite simple and I don’t understand why more people don’t use it. It could be a combination of people not knowing or maybe there is some sort of stigma with it. Nonetheless, the answer is buying with 5% down.

Yes, you heard me right – you can still buy with 5% down payment right now. Here are the requirements:

  • You must purchase this property for personal use;
  • 5% down payment is valid for up to $500,000; and
  • All amounts over $500,000 will require 10% down

Slow Savings – So why is this the quickest way to get into the market? Well, it’s simply because it requires the least amount of upfront cash that you need to save up for. The biggest challenge for those wanting to buy, in my opinion, is being able to save enough for that initial upfront down payment. The cost of living in Toronto has dramatically skyrocketed in the past few years so saving up for a down payment actually becomes incredibly difficult. I’ve seen many young professionals with high incomes renting because they simply can’t save up for the down payment quick enough. It’s just unfortunate.

Furthermore, you simply cannot save quick enough for how quickly the cost of real estate appreciates. I put the 2 charts below together to help illustrate this very point. I took the average income in Toronto of $60,000 and the price of a $500,000 purchase (entry level home in the GTA) and mapped it against how fast you can save for the down payment. I built in a measly 3% appreciation rate in the price, but let’s be real, properties in the $500,000 price range actually appreciates much faster than that.

Chart 1 below illustrates saving 10% of your money per year (yellow line). For fun, I mapped this out for 45 years because that’s how long you’re “supposed to” work for.

You can see from the chart that Year 5 is where you will save enough money for a purchase at 5% down (i.e., where the yellow line meets the purple line). However, at 20% down (red line), it’s clear that you will never save fast enough for a purchase – the yellow savings line never intersects with the red 20% down line. Yikes!

Now let’s look at saving at a rate of 20% per year.

You can see that the numbers are a bit better. At 5% down, you’ll arrive at your goal quickly in 2 years time while at 20% down payment, you’ll get there in 9 years. That’s not bad and sounds reasonable.

As a caveat, both of these illustrative charts are based on pre-tax money for simplicity. Given that we live in Canada, you’ll likely forfeit at least 18% of your gross income to our tax system before it even hits your bank account.

Getting Past the Stigma – So if people already know about being able to buy with 5% down, then why don’t more people do it? This is mainly because of the attached stigma relating to the carrying cost of a 5% down payment mortgage. You must get mortgage insurance with a down payment of only 5% down, and as a result, your monthly mortgage cost increases.

The following chart shows the difference in total monthly mortgage payment between 5% down and 20% down on a $500,000 property.

The difference, as shown above, is about $445 per month. If you’re making $60,000 per year in Ontario, your monthly after-tax income is approximately $4K, which means that you can carry the $2,338 per month mortgage (5% down scenario). So regardless of the mortgage insurance or not, the monthly mortgage amount shouldn’t be an issue if you’re in this income range.

The Wrap – The biggest difference between these two scenarios above is that you are IN the market quicker with a 5% down payment, and the cost of owning real estate won’t sneak up on you as you try to keep saving up for that 20% down payment.

This strategy makes complete sense to us, and we hope it makes more sense for you now. Hopefully this has also helped to demystify and pull the stigma out of the mortgage insurance component. If you want to get a more specific breakdown of costs, then make sure you reach out to me, Zhen, at 416-436-9436.

Until next time happy real estate-ing,
Zhen

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