Given how expensive cars have become, perhaps you’ve put off buying one. But if you’re looking to buy a home, you should know that borrowing money for a car purchase can throw a wrench into the mortgage application of an otherwise qualified buyer.
As mortgage brokers, we see it happen all the time. Let’s start with car costs, which have skyrocketed in recent years. The average price of a new vehicle in Canada reached $67,259 on AutoTrader.ca in December, up 35 per cent from two years earlier. The average price of a used car was close to $37,000.
Diligent savers might have been able purchase their vehicles with cash, and with finance costs skyrocketing in 2023, many of those who could, did. But plenty of Canadians lease or borrow money to pay for their vehicles.
A quick scan of auto finance rates from Car Loans Canada shows the current best rates at between 7.49 per cent and 10.99 per cent, so the average is 9.24 per cent. For a new-car buyer financing the average vehicle at $67,259 over a five-year term at 9.24 per cent, the monthly payment would be $1,398.
So how does this affect your mortgage eligibility?
That $1,398 monthly car payment slashes the mortgage amount you qualify for by a staggering $240,619. You might be surprised that a car, which costs $67,259, can have such a substantial impact on your mortgage qualification for a home that costs so much more.
The answer lies in the interest rate and the loan’s duration. Cars depreciate rapidly, prompting auto loans to be typically repaid within five years, leading to high monthly payments. In contrast, mortgages can span 25 to 30 years, at significantly lower interest rates because they are secured against the value of a home.
At our mortgage brokerage, we speak to tens of thousands of Canadians each year about qualifying for a mortgage – often for a first home purchase. We are always nervous when we get to the part of the application where we look at what vehicles our customers have, and what their monthly payments are.
It’s always a relief when customers reveal they’re still cruising in an old beater from their parents or relying on public transit and Uber. Conversely, it’s disheartening to guide a customer through the qualifying math, and make them realize that the new truck with the fancy rims and premium package has cost them the ability to qualify for the house they want in their market.
Of course, this analysis extends beyond cars. All regular payments servicing outstanding debt will similarly reduce your mortgage eligibility. Whether it’s student loans, personal lines of credit or credit card balances not paid off monthly, every debt payment affects your qualification.
At today’s rates, a good rule of thumb is that each $581 of monthly debt payment diminishes the mortgage you can qualify for by $100,000.
If your goal is to buy your first home, try to pay down your debt. Get yourself a transit pass, bike or if you must, have a car, but make it an inexpensive old banger.
The Globe and Mail, February 8, 2024