Mortgage unaffordability has been a front-page story for years.
That's why the average age of a first-time home buyer in Canada is now around 40 years old – one of the highest in the world, according to a recent report from Bloom Holdings.
But despite the misery faced by first-time buyers, things have reluctantly improved.
To illustrate, we can compare the real estate peak in 2022 to today and then consider the following:
- The 18 percent decline in national average home prices since that peak
- A homebuying couple who each work 40 hours per week at average wages
- The current leading nationally advertised five-year fixed interest rate of 3.69 percent
- The minimum down payment plus default insurance fees
- A 30 year depreciation
If we put everything together, we come across a surprising result.
The share of income needed to finance an average home purchase (also known as the “gross debt service” or “GDS” ratio) has fallen to 32 percent.
That's a significant drop of ten percentage points from the 42 percent nosebleed level we were targeting in 2022, and 32 percent has long been the recommended standard GDS rate.
While affordability is still uncomfortably high for many, the average borrower is in a much better position today than it was three and a half years ago – progress that few noticed because most of us were too busy complaining about high interest rates and a tight housing supply.
Of course, the averages hide many financial problems.
For recent grads holding their starting paychecks, or anyone stubborn enough to want a backyard in Toronto or Vancouver, the math goes from inconvenient to downright hostile.
“If I were advising my children between renting and buying, I would probably suggest renting in the GTA and GVA area,” says Martin Frenette, managing director of Strive Capital Corporation. And this is coming from a lender that makes the majority of its revenue from insured mortgage loans (i.e. loans to buyers with no 20 percent down payment).
“But there is no one answer to this question across the country,” he points out, as most of Canada is not caught in the same pressure pot as Toronto and Vancouver.
“It goes back to household economics and measuring your monthly mortgage costs relative to income. You don't want to exceed the standard guidelines if you can avoid it,” he said.
This means sticking to the 32GDS rule of thumb whenever possible so that you have breathing room.
Of course, in some markets it is much easier to live within your means than in others. For this reason, lenders and default insurers allow buyers to increase the GDS ratio up to 39 percent if they are eligible.
In any case, this improvement in affordability shows in the numbers. According to the Canada Mortgage and Housing Corporation (CMHC), the volume of default-insured purchases increased 25 percent in the most recently reported 12-month period. It turns out that when monthly payments drop from “impossible” to “painful,” people start signing on the dotted line again.
And alongside falling interest rates, government policy has been the key driver of these purchases.
Last year the government introduced a 30-year depreciation for first and new home buyers.
Ottawa also increased the maximum purchase price eligible for default insurance from $1 million to $1.5 million.
“We have seen a significant increase in volume due to the rule changes,” says Frenette. “Total loan amounts have increased by 10 to 15 per cent depending on the jurisdiction, particularly in Ontario and B.C.”
“Thirty-year paybacks now account for 60 percent of our high-ratio insurance business,” he adds.
This is similar to what I hear from other lenders. This is also in line with the Bank of Canada's latest national figures, which confirm that half of insured borrowers are now extending their payments beyond three decades, while no one was doing so 12 months earlier.
And of that group, almost half (46 percent according to Canada Guaranty) would not have been eligible for the same mortgage with a 25-year amortization.
“This rule change has opened the door for first-time buyers,” concludes Frenette.
The million-and-a-half dollar question is: Will borrowers be further ahead in the long run as home prices adjust upward due to increased purchasing power?
We'll park this philosophical hand grenade for a later column. For now, any newbie reading this should keep one thing in mind: Just because someone can qualify for a mortgage doesn't mean they should take one.
Beyond the nightmare of unemployment, the biggest concern for anyone managing a measly 5 percent loss should be this: If disaster strikes—like Trump's tariff policies, plunging us into a recession in 2026 and prices plummeting—you wouldn't be able to stand any equity in your castle for what feels like an eternity?
This is not a prediction of house prices, but think about what would happen if prices fell by, say, another 10 percent.
An insured buyer who purchases Canada's average priced home of $690,195 with the minimum down payment (currently 6.4 percent of the purchase price) would still owe $606,000 after five years of payments.
Still, her house would only be worth about $621,000, which would mean a sky-high LTV of 98 percent.
That means they would be stuck in that house—unless they wanted to sell and take a loss, in which case their original down payment would be lost forever.
And refinancing would be out of the question at all, because you need 20 percent equity.
All you can do is switch to another lender to get a better interest rate – assuming you find one that's happy with your qualifications, property and high loan-to-value ratio.
While affordability has definitely improved – which is beneficial for real estate markets and borrowers with a financial safety net – maximizing leverage requires a close look at your future options, or lack thereof.
Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.
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