How much do you have to earn to buy a home in Montreal or elsewhere in Quebec? If they spend one-third of their net income on their home - as financial planner Daniel Laverdière suggests - a couple would each need to earn $106,321 per year to buy a home on the island of Montreal (with a 20% down payment). Elsewhere in Quebec, it is much more affordable: in Saguenay, the members of a couple will each have to earn $27,328 per year to buy a house on sale at the median price.
The magic number in Montreal: $106,321
With house prices rising sharply since the start of the pandemic, how much does it take to buy a single-family home on the island of Montreal? About $106,321 per person for a couple, provided they have a 20% down payment.
Of course, a couple with lower salaries can easily meet the criteria for a mortgage loan. But how much of their annual income should they spend on their home?
There is no simple answer to this question. Or rather, there's no one right answer," warns Daniel Laverdière, financial planner and director of the Centre d'expertise at National Bank Gestion privée 1859.
The ideal for a couple is to try not to exceed the threshold of one-third (33.33%) of their net income (after-tax income) devoted to their home, he says. At 33.33 per cent of net income for the house, the person is going to have a more balanced financial life, to have lifestyle habits that go with their house," says Laverdière and is going to be able to set aside enough money for retirement and for payroll taxes [e.g., QPP, EI, QPIP]. "
"When you surpasse 35% of net income for a home, it's definitely a tight area with lots of trade-offs," says Laverdiere. It's important for that person to have a budget. For example, a single person can ultimately buy a house with 40% of their net income. This is not the end of the world, as long as this person understands and adapts his or her lifestyle accordingly. Maybe they won't be able to take annual trips and will delay their retirement. It's a matter of balance and lifestyle choices. You have to budget and take an honest look at your expenses. "
On the island of Montreal, single-family homes, a category that excludes condos and plexes, were selling for a median price of $690,000 in the first quarter of 2021. This is an increase of 28% in one year.
Per our request, financial planner Daniel Laverdière did the exercise: how much would a couple need to earn (before taxes) if they wanted to buy a single-family home in Montreal and still meet the goal of spending 33.33% of their net income on it?
We calculated a 20% down payment and a 25-year mortgage payment at 5.5% (per our request, Mr. Laverdière used the average of the 5-year firm rates over the last 20 years, not the current posted rates; financial institutions are currently required to use a rate of 5.25% as part of their credit test for mortgage borrowers). Property taxes and a reasonable reserve fund (0.5% of the value of the home per year) were added. In total, the amount reserved for the house (mortgage, property taxes, reserve fund) must constitute 33.33% of the couple's net income.
Based on these criteria, each member of the couple must earn $106,321 per year (pre-tax income) to purchase a median-priced home on the island of Montreal, with a 20% down payment.
With a minimum down payment (6.38% of the value of the house), the mortgage bill increases and the members of the couple must each earn $131,269 per year (income before taxes) to buy the same house in Montreal.
What about a single person? In practice, very few single people can afford the median house on the island of Montreal.
To meet the 33% of net income limit, a single person would have to earn $254,879 per year to buy the same $690,000 home (with a 20% down payment). What if they spent 40% of their net income on their home? Then they would have to earn $202,825 per year.
To buy a condo at the median price of $400,000, a single person would have to earn $129,000 per year to meet the 33.33% of net income limit with a 20% down payment. A couple would each have to earn $55,061 per year to purchase the $400,000 condo.
It’s a tip, not a hard and fast rule
In practice, a prudent homebuyer who spends one-third of his or her net income on a home when buying will see his or her situation improve over time. "Every year, it will get a little easier, because the salary increases but the mortgage does not," says financial planner Daniel Laverdière.
Of course, no one is obliged to respect this advice of the ceiling of one third of net income devoted to the house.
In practice, Quebecers who wish to do so can take on much more debt. Generally, financial institutions allow borrowing for a house up to 39% of gross income.
TWO TYPES OF MONTREAL BUYERS
690,000 home with 20% down payment ($138,000)
Total amount for the house (mortgage, property taxes, reserve fund): $4,125 per month
Cautious buyer Profile: Spends 1/3 (33.33%) of net income on home
Gross annual income required: Couple: $106,321 per person (23% of gross income)
Single person: $254,879 (19% of gross income)
Debt Buyer Profile: Spends 32% of gross income on home
Gross annual income required: Couple: $77,340 per person (43% of net income)
Single person: $154,679 (50% of net income)
Elsewhere in Quebec ?
If it is difficult to buy a house in the Montreal area, it is much more affordable in other cities in Quebec.
A striking example? In Quebec City, a couple with a 20 per cent down payment would need to earn $40,445 per person to buy a home at the median price ($300,000 in the first quarter of 2021), spending one-third of their net income on their home. However, in Quebec City, the average income was... $53,135 per person in 2020. This means that the average salary is 30% higher than the salary needed to afford a house for a couple (according to our criteria).
The average salary for a couple is also higher than the salary needed to buy a house in Gatineau, Sherbrooke, Saguenay and Trois-Rivières. In Saguenay, the average salary of a couple is even equivalent to 1.9 times what it takes to afford a house!
In Montreal, it's a different story: the average income is half as high (gross income of $53,194 per person) as what it takes for a couple (gross income of $106,321 per member of the couple) to afford a house at the median price, according to our criteria.
"The attractiveness of Montreal and, to a lesser extent, the north and south shores makes the situation there much more problematic than elsewhere in Quebec," says economist Pierre Emmanuel Paradis, president of the firm AppEco.
What about singles?
For a single person, it is possible to buy a house... as long as you live outside the greater metropolitan area.
To buy a house at the median price and spend 33% of their net income on it, a single person must earn a gross income of about $255,000 per year in Montreal, $162,000 in Laval, $159,000 on the South Shore, $131,000 in the northern crown, $125,000 in Gatineau, $92,000 in Quebec City, $90,000 in Sherbrooke, $63,000 in Trois-Rivières, and $62,000 in Saguenay.
To spend 40% of their net income on a home, they must earn a gross income of approximately $202,000 per year in Montreal, $129,000 in Laval, $126,000 on the South Shore, $103,000 in the northern crown, $98,000 in Gatineau, $75,000 in Quebec City, $73,000 in Sherbrooke, $50,000 in Trois-Rivières and $49,000 in Saguenay.
For the prudent buyer who spends 33.33% of his or her net income on a home, why does a single person have to earn 2.4 times more than each member of a couple to afford the same home? Because this is net income, i.e. after taxes. In our assumptions, we have assumed that both members of the couple earn the same salary. But the more money you earn, the higher the tax rate you pay. This explains why a couple must earn about $213,000 equally ($106,321 for each person) and a single person must earn about $255,000 to afford the same house, according to our calculations.
Source : Article by Vincent Brousseau-Pouliot on the website lapresse.ca on 6th June of 2021
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