Options for first time home buyers

Interest rates are going up, mortgage rules have changed and house prices in some parts of the country don’t seem to be going down – yet. This may not look good for first time homebuyers who may find they can’t afford to buy that dream house – yet. But it’s not all gloomy. There are still areas of the country where prices have remained steady; and if all goes the way the government indicates, prices may start coming down in 2018.

First timers should still be looking at their options.

Usually the biggest obstacle for first time home buyers is coming up with the down payment. In 2017 the average down payment for first time home buyers was 26%. Sources included:

•         Loans, gifts from parents and/or other family members (accounted for 18% of down payments)
•        RRSP withdrawals (accounted for 7% of down payments)
•        Own savings (accounted for 54% of down payments)
•        Loan from a financial institution (accounted for 19% of down payments)

With the new rules introduced over the past year and the fact that we’re now in RRSP season, it’s a good time to look at the Government of Canada’s Home Buyers' Plan for first-time home buyers, which allows them to withdraw up to $25,000 from their RRSP, without a penalty.  If you are married or purchasing the property with another first-time home buyer, each of you may withdraw the maximum each for a total of $50,000.

Once you decide to use your RRSPs then there are a few rules.

What’s the definition of a first-time home buyer?

You are considered a first-time home buyer if, in a four-year period, you have not occupied a home that you or your common-law partner or spouse owned. Even if you or your spouse or common-law partner have previously owned a home, you may still be considered a first-time home buyer.

The four-year period begins on January 1^st of the fourth year before the year you withdraw the funds and ends 31 days before the date you withdraw the funds. For example, if you withdraw funds on March 31, 2018, the four-year period began on January 1, 2014 and ends on February 28, 2018.

If you don’t fit that four-year window yet, you could wait and buy later. For example, if you sold your home in 2013, and did not purchase another one until 2018, you can participate as a first-time home buyer.

Also, buyers must have a bona fide purchase agreement for a house that will be owner-occupied.

What’s a qualifying home?

No rentals or investment properties. You must have either bought or built the home before October 1^st of the year, after the year of withdrawal. And you can buy or build the home alone or with others. When purchasing with others, the benefit applies to the entire purchase even if only one person qualifies as a first-time home buyer.

Paying it back

RRSP withdrawals must be paid back within 15 years so each year 1/15 must go back into the fund. If not, then that amount will be taxable. For example, if you withdraw $25,000 from your RRSP then you must pay back $1,667 every year for 15.

However, it’s not straightforward – you must designate the amount as a payback for the Home Buyer’s loan.

RRSP withdrawal conditions

• You have to be a resident of Canada at the time of withdrawal
• You have to receive all withdrawals in the same calendar year
• You can only withdraw up to $25,000
• No tax will be withheld
• You cannot withdraw from an RRSP that is locked in
• Your RRSP contributions must be in the account for 90 days before withdrawal
• You must fill out a form to withdraw funds, which can be found at the Government of Canada website

TIPS

You may want to consider borrowing to deposit into an RRSP this tax season which, after 90 days, can be used as a down payment. There might also be a tax benefit for you.

You can use your RRSPs as a down payment more than once as long as the balance from the first withdrawal has been paid back in full.

To keep track of your account, each year you will get a statement with your Notice of Assessment showing what you owe and how much contribution you have in your RRSP.

TFSA

This might be a better way to save for your down payment. It is, however, a longer-term strategy. There isn’t a lot of room to save, the maximum is $5,500 each year, but your money grows tax free. When you hit your target, you can withdraw the money with no strings attached.

For more information about the Home Buyer’s Plan and to develop a plan for your down payment, contact your mortgage professional. He or she has the tools and the expertise to help you realize your dream of home ownership.

New down payment rule change – will it affect you?

By Mark Kerzner, President TMG The Mortgage Group

What a difference a week makes.

The new Liberal government is making its voice heard loud and clear with respect to the Canadian housing market and its concerns about an overheated housing market in certain cities in Canada.

By increasing down payment requirements for properties greater than $500,000 the Minister of Finance, Bill Morneau took the position that, “The actions taken … prudently address emerging vulnerabilities in certain housing markets, while not overburdening other regions.”

While the industry knew changes were being considered, only a few would have bet on the speed with which they were delivered.

It is important to understand that increasing down payments has been talked about for many years and the results could have been much more severe.  I suppose, at its core, down payment minimums could simply have increased to 10% across the board. In presenting it this way the Minister has recognized geographic market differences. Please refer to the chart below for a simplified display of the extent of the change (showing that its maximum impact is increasing down payment to 7.5% for homes valued at $999,000, or $25,000)

Without a doubt the real estate sector, including the mortgage market, remain top- of-mind with our new finance minister. This change, along with some proposed changes from OSFI related to lender capital requirements, and CMHC changes related to guaranteed fees in the mortgage-backed securities market will surely lead to incremental costs for our mortgage funders.

These two additional changes seemed to have been timed to bring about a series of changes at the same time, which taken together, are designed to curtail a rising housing market. It is important that we are as aware of them as we are of the down payment increase.

When funding costs for our lender partners increase, they are likely to be passed along to consumers in the form of higher rates.  These increased direct costs to consumers, in the form of higher down payment requirements, combined with higher funding costs will certainly impact affordability on the margin. In doing so, the government is hoping it will create more balance in the market – perhaps by slowing it down in certain areas.

And while the intended ‘targets’ were likely Toronto and Vancouver, CIBC deputy chief economist, Benjamin Tal wrote a report that showed the unintended consequences may be felt more in cities such as Calgary, Victoria, Edmonton and Hamilton as those cities have a higher percentage of high ratio sales between $500,000 to $1M.  That said, overall impact is estimated to be less than 3.5% of the market.

For more than half a decade we have been working though times of increased regulation and oversight.  Some of those changes have brought about the increased use of secondary and private lenders for some, and increased down payment requirements for others. And while costs may have increased on the margin for some, ultra low interest rates along with a high degree of consumer confidence have buoyed housing markets in many markets across the country.

For years we have advocated government and policy makers to tread carefully around broad stroke changes to increase down payments. Given the government's intent to make this policy change I am pleased to see that it was done on the margin and took into consideration regional market realities.  The Department of Finance has drafted the following FAQ for more context.

While our initial reaction is always concern, I think it’s reasonable to estimate that these changes will not dampen the real estate markets to the point of collapse. In fact, we will continue to operate in a very robust and confident lending environment.

As we are assessing this latest change, it’s important to remember there are still a number of very important items on the radar as it relates to potential changes in mortgage regulations. These include foreign ownership in a broad sense and Canadian residents buying investment properties. Since both of these items already require at least 20% down payment, other levers may be evaluated as a means to influence the market.

Mortgage brokers save consumers money, whether or not they use a broker. That is because competition breeds responsiveness. Even though we are living through a period of heightened regulatory oversight, the broker channel continues to grow. The reason is that consumers need and value our experience and expertise to navigate the mortgage landscape, ultimately sourcing them the lender and product best suited for their financial need.

If you are a mortgage consumer reading this, I urge you to contact your mortgage broker today.

Is real estate a good investment? The long answer is yes

It seems it’s a tough world for Gen Y’ers – high student debt, shortage of jobs, living with parents longer, and now the dream of home ownership might have to wait. Yet, an RBC poll released early in April found that young Canadians see home ownership as a good investment and 41% of the respondents plan to buy. The poll also found that 86% of those aged 25-34 believe owning a house or condo is a solid investment, up from 78 % last year.

So is real estate still a good investment?  The RBC poll confirms that it might be, at least as far a millennials go.  “The increase in the number of those who feel the housing market is a good investment, as well as the number of those who intend to buy, really highlights that Canadians have no doubt in the strength of the housing market”  said Erica Nielson, RBC’s vice president of home equity finance, about the poll results.

Here’s how the results breaks down per province:

• Ontario, Quebec and the Prairies saw the biggest surge in home-buying interest over last year
• Ontario, 24% said they have intentions to buy this year, up from just 14% in 2013.
• In Alberta, 28 % said they hope to buy this year, up from 22 % in 2013.
• Atlantic Canada also saw some increase in buyer intentions.
• In B.C. the percentage of those who are likely to buy a home has increased slightly, from one-in-five (20%) in 2013 to more than one-in-five (22 %) in 2014.

Interestingly, a discussion initiated by the Globe and Mail asking the question about real estate as an investment received a lot of attention. Those who answered do believe that a home is an investment that builds wealth in addition to it being a place to live.

Let’s take a closer look at that. Those who are pro a home as a good investment will point to the increase in resale prices over the past 10 years, which have increased more than 6% annually since 2000, according to the Canadian Real Estate Association (CREA), which is triple the inflation rate. This increase helped improve a household’s net worth, unless you were under the age of 35.

In February, Statistics Canada reported that the median net worth for families increased 78% from 1999 to 2012 on an inflation-adjusted basis, or about 4.5% a year. However, in households where the age of the highest earner was under 35, net worth grew just 8.6% in total, or about 0.6 per cent a year. Since inflation averaged 2.2 % over that period, as reported by Rob Carrick in the Globe and Mail, “those young-adult households actually lost net worth on what economists call a real basis.”

That’s not really a surprise since gains in net worth have been driven by real estate appreciation and those under 35 years of age have less equity in their homes. Can they catch up? Well, prices can’t rise indefinitely – so say many economists – so that may not be helpful when trying to make a sound financial decision.  However, there are a few hot markets in the country that might buck the trend.

For example, in Alberta, and especially in Calgary, real estate is a growth industry. Heather Manna, Managing Partner and Mortgage Broker at TMG Millennium Mortgage Group in Calgary says that real estate definitely is a good investment. “Over the last few months we have seen lenders loosen the reins on financing restrictions, which is making it easier to qualify a consumer who is in the market to purchase a new home,” she said. “This, combined with the low mortgage rates, continues to make real estate a great investment, whether you are buying to occupy the home, or purchasing for an investment.”

And why not invest in real estate, Manna asks? “Just like the stock market there will always be lows and there is always a correction. It’s about keeping well diversified and that includes having your home in your portfolio,” she said. “If you need a roof over your head, you might as well be paying your own mortgage down instead of someone else’s.”

There is also a shortage of listings in the Calgary market, which is upping the prices there. The rental market is also very tight with a 1% vacancy rate. “If not purchasing a property long term for your family, the rental market proves to be aggressive year-after-year for income earning potential or a retirement plan,” Manna added.

Granted, Calgary may be an exception, however there are similar hot markets in both B.C. and on the Prairies. Ontario and the Atlantic provinces have hot areas. Some economists say that prices will struggle to show any real gains in the next five to 10 years unless you happen to be in a hot market. But in some of those markets affordability is the real issue and young people are looking for help with larger down payments from their parents.

The hidden story for Gen-Y’ers is debt load. Statistics Canada says under-35 households owed $36.44 per $100 in assets in 2012, by far the highest of any age group. Purchasing a home adds to that debt load, not only with mortgage payments, but interest, property taxes, insurance and maintenance costs. If there is a modest 5% drop in house prices, then a 5% down payment equity position is wiped out.

However, in a Globe and Mail article published on Wednesday, April 23, Will Dunning, chief economist of the Canadian Association of Accredited Mortgage Professionals (CAAMP) says he thinks that home prices have turned.

Using data from the CREA, he said that sales of existing homes rose last summer and peaked in the August-September period. Although here has been a slight rise during the past two months, he doesn’t see this as meaningful.

Dunning referred to the Teranet-National Bank home price index, which shows a very gradual increase in prices over the last while. “If you take the price index and seasonally adjust it, it shows a sharp pick-up in price growth around the time I would have expected it to have occurred, and “the last data point hints that on a seasonally-adjusted basis, the period of rapid growth has ended – when it should have.”

With prices stabilizing, low rates, larger down payments, real estate starts to look better, especially as a long-term investment, which it actually should be. There was a time when a couple would buy a house, live there, raise their family there, and then retire there, mortgage free. We may be coming into those times once again.

 The most important question to ask is, “am I ready?” Consider a home a long term investment -- its value will fluctuate up and down over time, but eventually you’ll be mortgage-free. It’s a big commitment, but it’s also a great achievement. Home ownership offers a great deal of personal satisfaction, as well as financial stability.

There is no right or wrong time to buy a house. Mortgage rates and house prices will fluctuate but over the long term, home ownership is still a sound investment. 

Ask yourself:

•  Are you at the point in your life where the idea of home ownership is attractive and makes sense, both now and for the long term? 
• Do you qualify for a mortgage, and how much? If you don’t know, talk to a mortgage professional.
• Can you manage the mortgage payments as well as other expenses that may come along with home ownership, such as maintenance costs and higher insurance fees? 
• Do you have a down payment?
• Do you have a strategy to take advantage of this low interest rate environment to more aggressively pay down your mortgage and accumulate equity?

If you answered yes, then it’s the right time to invest in real estate.