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A gleaming luxury car in the driveway is a badge of honour for millions of Canadians. But for those on the hunt for home sweet home, flashier autos often equal humbler abodes.

Most Canadians innately understand the tradeoff. They get that a swanky, depreciating vehicle means a slimmer wallet come retirement. Yet, they rationalize car splurges as an investment in happiness.

Happiness may be hard to quantify, but financial costs aren't. Sky-high car payments kill real estate dreams in more ways than one.

#1 — It's harder to save a down payment

• Diverting another $600 monthly to a car means saving $32,512 less over 48 months—assuming a 6% tax-free return.
• Stash that $600/month in a First Home Savings Account, and a middle-bracket earner could net another $8,000+ in tax breaks.

#2 — Buying power gets shaved

• For an average Canadian family earning ~$140,000 last year, an extra $600/month car payment could spike their total debt service (TDS) ratios by over 5%-points.
• That translates into almost $100,000 less buying power.
• That's no small potatoes, given that 69% of homebuyers pay the maximum price they can afford, says CMHC.

#3 — Appreciation shrinks

• Since 1981, the typical Canadian home has risen 5.78% over an average 12-month span.
• Even if slower population growth and mounting supply result in just a 4% long-term appreciation rate, qualifying for $100,000 less house means a buyer forgoes:
  • $119,000 of tax-free gains after 20 years *
  • $167,000 of tax-free gains after 25 years *
  • $224,000 of tax-free gains after 30 years *
    
    * Assuming it's a primary residence.

More car, less house

Let's zoom in on point #2 because it's the tradeoff between location, size, and home features that people feel the most.

Below are real examples of what buyers give up when they spend $600/month more on a car. We assume they've put 20% down, got a 30-year amortized mortgage at 4.99%, and have no other debt. Here's how upgrading their car downgrades their home options.
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If federally regulated mortgages were a club, OSFI would be the bouncer, and it's decided to be a bit more selective about who it lets in. The bank regulator's upcoming loan-to-income (LTI) limit will result in incrementally fewer borrowers being approved by prime lenders. That's the bad news—if you're a prime lender or affected borrower.

The good news is that—apart from there being workarounds (more on that)—the calculation of LTI isn't as bad as some feared. Here's why, and note, we got these clarifications straight from OSFI:

Neo Financial wants to be your one-stop shop for financial services, and now it's rolling out the red carpet for mortgage brokers.

The company—known for its "Neo Money" and "Neo Credit" accounts, which dole out 5-15% cash back on purchases from Neo Partners—launched its mortgage lender in October. It gets its mortgage business mainly from cross-selling its credit card and investing customers. But as of this quarter, it has launched a pilot to drum up broker channel business.

The company launched in 2019, has big-time partnerships (e.g., Tim Hortons & Hudson's Bay) and counts over one million customers. It is backed by superstar venture capital investor Peter Thiel and has received $288M in funding to date.

For a minority of mortgage shoppers, the price of leverage is going up.

Canada's banking watchdog, OSFI, has confirmed to MLN that it will enforce a new restriction on mortgage borrowing.

"The LTI measure we are implementing is a portfolio test that is designed to prevent the buildup of highly leveraged loans during low interest rate periods," an OSFI official told MLN today.

Unlike the #stress test#, which is a borrower-specific limit, "the Loan to Income (LTI) measure is a portfolio test," the regulator says. Hence, there's no rule that says an individual borrower can't have an LTI over 4.5x. It's the lender that will determine what LTI they'll allow, subject to all other underwriting guidelines.

"This measure means that institutions, in any quarter, can only have a certain percentage of their mortgages in excess of 4.5x LTI," OSFI says. Previously, OSFI contemplated a 25% allowance above that threshold, but now it will be case-by-case, depending on the lender.

The new limit "applies to the institution’s portfolio of underwritten mortgages that originate that quarter and needs to be managed by the institution."

For borrowers, here's what this means in practical terms.