No generation has had a tougher time getting into the housing market than Generation Y. Indeed, the deck is stacked against Millennials, many of whom are burdened with crushing student debt loads, grim job prospects, and limited wage growth in a stagnant economy. Furthermore, the federal government cracked down on 40-and-35-year amortization mortgages, mostly to avoid a U.S. style housing collapse, and there’s talk of raising the minimum down payment from 5 to 10 percent.
Yet housing prices have continued to surge over the last decade, particularly in appealing centres such as Vancouver and Toronto, fuelled by record low interest rates and booming condo sales.
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But first-time homebuyers still represent a large portion of the housing activity in Canada. According to the Canadian Association of Accredited Mortgage Professionals (CAAMP), an estimated 210,000 of the 425,000 homes purchased in 2014 were from first-time buyers.
Down-payments for First-Time Home Buyers
These property virgins aren’t just putting down the bare minimum in order to get into the market. CAAMP estimates that, on average, first-time buyers make down payments equal to 21 percent of the price of their homes. That’s no small chunk of change. With average home prices across Canada surpassing $450,000 this summer, a 21 percent down payment represents nearly $95,000.
So where does the money come from? Here’s what the CAAMP survey found:
Personal savings (40 percent) – First-time buyers are using their own savings to get into the housing market – with a reported 40 percent of total down payments coming from the personal savings of applicants and their co-applicants.
Tax-free savings accounts represent a flexible way for first-time buyers to save up for a down payment. With annual contribution limits rising to $10,000 this year, couples have the potential to save up to $20,000 per year inside their TFSAs and invest the funds in a variety of ways – from high interest savings accounts and GICs, to stocks, mutual funds, and ETFs.
Gifts and loans from family (17 percent) – Funds procured from the bank of mom and dad are on the rise. Gifts and loans from family represent 17 percent of down payment funding for first-time buyers, which is up from 13 percent five years ago.
While not as significant a source as some might speculate, gifts and loans from parents and other family members are becoming more common in expensive markets like Toronto and Vancouver.
RRSPs and Home Buyers’ Plan (12 percent) – Withdrawals from RRSPs using the Home Buyers’ Plan (HBP) have declined in recent years, down from 16 percent between 1995 and 2004.
The HBP allows first-time buyers to withdraw up to $25,000 from their RRSP to put toward a down payment on a home. But with declining savings rates, a relatively low maximum withdrawal amount (when compared to the amount needed to qualify for a home today) and the introduction of the TFSA, the HBP may have become redundant in today’s market.
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You have up to 15 years to repay your HBP loan, starting in the second year after the year in which you withdrew the funds. But research from Canada Revenue Agency suggests that 35 percent of HBP withdrawals are not repaid each year.
Although it’s become increasingly more difficult to buy a home today, it’s clear that first-time homebuyers are the engine that fuels the housing market – representing nearly half of all home buying activity in Canada.
The challenge comes when first-time buyers can’t save fast enough to keep up with a hot real estate market. That type of pressure can lead to emotional decisions, such as buying before you’re financial ready, or borrowing the funds through alternative lending or cash-back mortgage incentives, all in order to avoid getting priced out of the market forever.