Millennials, mortgages, mom and pop
By: Joel Schlessinger
Caitlin and Shawn Dyck are real-estate curious no more.
The 20-something couple moved into their first home earlier this month after years of waiting on the sidelines watching mortgage rates, going to open houses, saving and budgeting — essentially testing the waters for a life milestone they believed was years away.
“I would say we were pretty real estate curious, yes, but it (home ownership) was our goal for a long time,” says Caitlin, 25, who works for a non-profit in the city.
Still, the couple never envisioned themselves in a home of their own so quickly. Sure, they’d been saving for a few years.
But they were struggling to come up with a down payment as real-estate prices continued their ascent.
“We figured it was going to be out of our reach for awhile,” she says.
At the rate they were going, they thought they wouldn’t be able to buy a home until their 30s. Yet with some money from their wedding last year, and some help from family, they managed to cobble together enough for a down payment.
“We wouldn’t have been able to afford it otherwise, and I think that’s the reality for a lot of people our age,” she adds.
While low interest rates have made mortgages more affordable in Canada, they’ve also helped fuel a nearly two-decade bull market in real estate with prices steadily rising and in some cases soaring, year over year. This has been a big benefit for older generations of homeowners — the boomers, in particular — who have seen the equity in their homes swell.
But for millennials such as the Dycks, the low-interest-rate environment is cutting both ways. Low rates help them afford larger mortgages than in the past.
But the high real-estate prices put them in an unprecedented position of needing to save for a significant down payment for homes that in some cases have tripled in value over the past two decades.
Increasingly, young buyers are relying on help from family to achieve the middle-class dream of home ownership. A recent Canada Mortgage and Housing Corporation (CMHC) survey found that almost one in five first-time buyers have received financial help from their family.
Financial adviser Josh Olfert — himself a millennial homeowner — isn’t surprised by the numbers. He says it’s difficult for young adults to get into the market without some kind of help.
Even when it’s not a financial gift, most first-time buyers need a co-signer.
“In my experience, as with most millennials, a co-signer was needed because my credit history was so young,” says Olfert, an adviser with Haven Wealth Management in Winnipeg.
(When he applied for a mortgage, he had only a credit card with a $1,000 limit.)
Because of the many challenges, Olfert says many of his peers choose not to pursue home ownership — at least at first.
“Their goals typically start with maintaining some financial security, travelling and accumulating long-term wealth — with having their dream home somewhere near the bottom of the list.”
Those who do chase the dream, and in turn their family is willing to help, have a few different ways to go about arranging the familial financing, says the head of a credit union in North Vancouver.
“The first and most common way is simply providing a gift, but that has issues,” says Chris Catliff, CEO and president of BlueShore Financial, adding about 70 per cent of its first-time buyers at the Vancouver financial institution rely on help from family.
Among the potential pitfalls is the possibility half the gift could end up in the hands of their child’s partner if they split up down the road.
He suggests as an alternative parents can still gift the money, but they can do it as a formal no-interest loan that has to be repaid only upon sale of the home.
In other instances, like Olfert’s, it’s not money that’s required. It’s having a parent co-sign. Even this can result in problems.
“It doesn’t really impact the parents’ savings and it’s easy to do, but the problem, of course, is then they’re on the hook for the child’s payments,” Catliff says. “That may impact their credit rating and create financial burdens for them.”
Regardless of how it’s done, parents or other family members backing first-time buyers may want to keep tabs on the kids’ financial well-being. And a new app actually provides that ability.
Monitor My Mortgage wasn’t designed specifically for parents helping their children with home ownership, but the issue came up during the product’s development.
“We designed that into the software so parents could actually have a little bit of governance of the loan position they would have on the property,” says Brent Hughes, founder of Monitor My Mortgage, software that lets mortgage holders monitor the lending market, notifying them if a better rate is available — net of penalties for breaking the existing mortgage.
In development, a focus group member — a man with a millennial daughter who was house-hunting — asked whether the software would allow parents to follow their children’s mortgage, too.
“It was funny because the gentleman’s daughter was sitting right there and she said, ‘I’d love that if you had access to it.’”
Hughes says this is largely a reflection that first-time buyers appreciate a little guidance along with the financial help from family, especially when navigating the early days of home ownership.
Caitlin and Shawn Dyck feel they are doing well managing their finances on their own. Yet even they feel trepidation about how their budget will pan out as they adjust to their new home.
“The first few months will be a nervous time just because we have all these new bills that we’ve never paid before,” says Shawn, 24, who works for a Crown corporation in the city.
“It’s a little different from paying the monthly rent and not worrying about anything.”
Still, the couple wholeheartedly believe home ownership is worth any budgeting challenges they may face in the coming months.
“It’s so nice that it’s ours as opposed to renting from somebody,” Caitlin says. “It feels really good.”
Know the cost of ownership: Owning a home is about more than the mortgage payment, financial adviser Josh Olfert says. Plenty of other costs need to be factored in that you don’t have to pay when renting: closing costs, utilities, property taxes, home insurance and mortgage insurance. Then there are maintenance expenses and probably additional costs associated with furnishing a larger living space. Consequently, budgeting before and after becomes all the more important. Track your current costs of living and income while renting, and then try to estimate all the additional costs that might come with owning a home. It may turn out that home ownership isn’t all that appealing if, after crunching the numbers, you’ll have almost no cash left every month to enjoy life.
Don’t rush: Home ownership is a major commitment — a decades-long one. So it makes sense to expect finding the right home to take several months, maybe even years. Do visit plenty of open houses to get a feel for what you like and don’t like. And try not to settle thinking “this will be nice for the next couple years before we move on to a better place.” Olfert says this line of thinking can be costly. “Most young people are unaware of the costs of moving,” he adds. “Realtor commissions, home inspection fees, moving fees, legal fees, mortgage life insurance renewal, land transfer taxes, title insurance and additional CMHC fees on a new mortgage — all of these things culminate to dramatically decrease net worth if you opt to move too soon and too often.”
It’s a place to live, not an investment:People often look at their home as an investment with the added bonus of being an asset they can live in. And this is indeed true. But it’s not as good of an investment as one might think, Olfert says. After interest and all the other costs involved, it’s an investment that isn’t all that lucrative over the long haul. First and foremost, new buyers should view home ownership as just that. They’re securing a place to live for a long time that they hopefully will enjoy. And with a little luck, the home’s value will grow as the mortgage is paid, building up equity that can serve as the bedrock for family wealth and security.
Avoid biting off more than you can chew:Lenders will often pre-approve buyers for the maximum they can afford, but that doesn’t mean you should borrow all that is offered. Otherwise you could be stretching your budget, potentially exposing yourself to trouble if rates rise. “A one per cent increase in rates could add an extra 10 per cent increase to your monthly payment at renewal,” Olfert says. Less is more, and that additional cash flow in your budget can be used for other goals such as retirement, where your money is likely to go much further in the long-term.