This post was written by Mr. MMC (My Money Counts)

Buying a house is stressful enough that finding ways to reduce some of the stress is always a welcome reprieve.  One of the things I provide my clients to help them in their search is what I call the “Median Family Benchmark”.  It’s a simple calculation to determine where you stand financially before embarking on the biggest purchase of your life, a home.

The Premise

The premise of the benchmark is 2 simple questions:

  1. Based on the current median price of the property I’m looking to purchase, would a median family income in my city/town/are etc. be able to afford and carry the mortgage?
  2. If so, and based on my family income, can we afford the median family house and be able to carry the mortgage or should we adjust our purchase price and expectations accordingly?

The benchmark is a ‘rule of thumb’ guide which I think eliminates a lot of noise and encourages buyers to ask honest questions to themselves so they aren’t buying too much house than they need.

The Data

Depending on where you live, finding data to input for this calculation may be cumbersome depending on how recent the available data is or if it is even available for your neck of the woods.  For us living in Calgary, pretty much everything was a few Google queries and mouse clicks away.  I’m going to use our city as an example, feel free to try it for yours too.

To begin I looked at the median family income in Calgary ($104,530 in 2014 according to StatsCan), factor in Alberta inflation over the last couple of years and it rises to $105,795.  Afterwards I searched the local real estate board’s report for the median sale price of a detached family house – $479,900 (substitute the equivalent median price for the property type you’re looking to buy to better reflect your standing).

Using what I consider the best mortgage calculator I calculated the carrying costs based on 5% and 20% down payments and took into consideration the new Government of Canada mortgage qualification rules.  The 5% down payment is the lowest required to purchase a home, but the buyer would need to obtain mortgage default insurance through CMHC or Genworth.  This insurance is usually added on to the mortgage and included in the full amortization calculation by lenders.  The 20% down payment is the minimum down payment required to avoid mortgage default insurance.  Property tax was calculated using the City of Calgary’s residential tax rate and used Insureye to estimate homeowner’s insurance costs.  For the carrying mortgage rate I’m using the current discounted 5yr fixed rate most big banks are offering on RateSpy– you should use the best rate offered by your lender.

Calculations

5% down payment (qualifying): New government rules require buyers to qualify based on 5yr term at 4.64% and maximum 25yr amortization if down payment is less than 20%.

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5% (carrying mortgage): based on the new mortgage rules the $500 difference in monthly carrying costs between the qualifying rate calculation and the discounted rate may be the difference in affordability where you live.

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20% down payment: at 20% you most likely won’t be required to qualify at the 4.64% rate and the lender would most likely use the discounted rate to calculate your carrying costs.

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Conclusions

Of course there is a huge savings between a 5% and 20% down payment, but not everyone will have $95,000 in savings.

This exercise isn’t meant to dissuade you from buying a home if you find that the median house in you are is out of reach or you don’t have enough savings to meet the potential down payment costs.  It is simply pointing out that you may have to wait a little bit, or adjust your purchase price, or property type in order to afford the right house.

House shopping is enough of an emotional roller coaster ride, no need to extend the ride after moving in.  There will be enough kinks and quirks about the house for you to fret about later without the added stress of financial affordability.

This post was written by Mr. MMC (My Money Counts)