Car loans, leases can have a big effect on mortgage affordability

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Be careful about car loans.

A recent study showing the impact of auto loans on mortgage affordability highlights the perils for first-time buyers, move-up buyers and even refinancers.

“When speaking with first-time buyers, if they are not yet pre-approved and just starting the process, I let them know that any debt they have impacts their mortgage approval,” says Beverley Hasinoff, associate realtor with Liv Real Estate in Edmonton.

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“Car loans and leases especially can have a huge impact.”

The recent report by Zoocasa looked at the average monthly car payment and what percentage it would make up of the average monthly mortgage or rent payments in cities and regions across Canada.

Edmonton ranked in the top 10 in Canada for being the most affected where the average monthly car payment of $1,427 was 79 per cent of a monthly mortgage payment.

To determine the monthly car payment, the study used the average purchase price of a new car on Autotrader in September, $67,187, using an interest rate of 6.87 per cent for financing, based on Statistics Canada data.

The monthly payment for the loan was $898. Then, the study added gasoline, maintenance, insurance and parking costs, to reach a total of $1,427 a month.

For the monthly mortgage payment, the study utilized the average home price for each city or region at the end of September. In Edmonton, the average price was $428,959. The mortgage cost was based on a 20 per cent down payment and a 3.99 per cent fixed interest rate over a five-year term. For Edmonton buyers in the report, the monthly mortgage cost was $1,803.

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Average monthly rent was based on a one-bedroom apartment in each city or region. In Edmonton, average monthly rent was $1,360 in September. In turn, the study found the average car payment amounted to 105 per cent of monthly rent in Edmonton.

That ranked the city third behind Regina and Saskatoon for auto costs as a percentage of monthly rent.

Among cities and regions, monthly car payments took up the highest percentage of mortgage payments in Newfoundland and Labrador. There, auto expenses were 107 per cent of a $1,338 monthly mortgage payment, based on the average home price of $318,329.

In Greater Vancouver, a monthly car payment took up the least percentage of mortgage costs. There, automotive expenses made up 27 per cent of a monthly mortgage payment of $5,290 for the averaged priced home of $1,258,450.

The Zoocasa report illustrates how some home buyers and homeowners refinancing are facing challenges from auto loans, says Edmonton mortgage broker Marc Crossman with Alberta Mortgage Pros.

“Recently had clients that were refinancing, but there was a challenge due to one of the applicants having a car payment.”

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Crossman notes the couple were turned down by a top-tier lender. Consequently, the clients had to look for financing from a B lender, involving a higher interest rate and more fees.

It’s also common among workers in high-paying industries like oil and gas to purchase “really expensive trucks” with payments as high as $1,000 a month, he adds.

“When they are single and making good money, it’s manageable.” Yet once married with children and seeking to purchase a larger home, these individuals can find their purchasing power diminished.

In turn, Crossman typically recommends clients reduce car payments — which might involve selling a vehicle — or decrease their home purchase budget.

Debt advice doesn’t just stop at pre-approval.

Hasinoff often reminds clients not to take on any substantial debt until they have financing finalized for a home purchase.

“Significant changes can be a cause for concern, which, in turn, may cause the lender to pull the approval at any time until the purchase is funded.”

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