How much do you need to earn to buy a home? Fall data shows increased affordability

The annual income required to buy an average home in Toronto has dipped below $200,000, the latest data shows.

Thanks to decreasing mortgage rates and real estate prices, homes in most major cities across Canada became a bit more affordable last month, according to calculations from Ratehub.ca.

The calculation accounts for average home prices in each city, as well as the requirements to qualifying for a mortgage at a bank.

Income requirements dropped in most markets, dipping by as much as $5,000 per year in Vancouver.

The exceptions were in Montreal and St. John's, where average home prices rose almost $10,000 month-over-month.

Ratehub says affordability was helped by three recent rate cuts from the Bank of Canada — and that recent inflation data "has greatly increased the chance of a 'jumbo' half-point cut to come from the central bank on October 23."

Variable mortgage rates are directly affected by a change to the Bank of Canada's interest rate, and fixed-rate mortgages "take their cues from fluctuations in the bond market, which tends to react favourably to central bank rate cuts," the post says.

Mortgage rate stress test

A lower mortgage rate means the mortgage "stress test" is easier to pass. The test uses a mortgage rate two percentage points above the rate a buyer is getting from a lender (or 5.25 per cent, whichever is higher) to gauge whether the buyer can financially handle a jump in mortgage payments.

The test factors in home price, annual salary and other debts and expenses to come up with a ratio that is essentially total monthly debts compared to total monthly income.

The Financial Consumer Agency of Canada's Mortgage Qualifier Tool can be used to calculate the "gross debt service" and "total debt service" based on property value, down payment, mortgage rates and debts.

Note: The tool above uses recommended ratios (32 per cent for gross debt service and 40 per cent for total debt service) as a guideline. Ratehub's calculations used the Canada Mortgage and Housing Corporation's highest allowable ratios (39 per cent and 44 per cent, respectively).