Millennials and mortgages

Content courtesy of Solutions magazine.

A guide to buying your first home.

Millennials in Canada are facing a very different home buying environment than their parents. Soaring real estate prices, high levels of student debt and precarious employment are making it difficult for young people to get into the housing market.

Despite these challenges, a recent survey found that 80 per cent of Canadian millennials hope to own a home someday.¹  What’s more, 27 per cent are already homeowners.² If purchasing a home is a goal for you, here are some tips to guide you through the process.

See what it will cost

Look at home prices in and around your desired location and be realistic about what you can afford.  Perhaps moving to the outskirts or setting your sights on a smaller property can bring costs down. You might also need to think outside the box a little – like bringing on a tenant to help lower the carrying cost of your new home.

Keep in mind the purchase price is only one part of the equation – closing costs such as real estate commissions, legal fees and land transfer tax can add an additional four per cent to the purchase price.  You’ll also want to factor in ongoing expenses like property taxes, mortgage insurance, utilities and maintenance.

Save for your down payment

If you aren’t already saving, start now. If you can put down 20 per cent of the purchase price, you’ll avoid needing to purchase mortgage insurance (which can add thousands of dollars over the course of the mortgage). If not, at least five per cent is required for first time buyers. Consider setting up a dedicated home buying fund and putting aside money from every pay cheque. Pad your savings with tax refunds and any bonuses or gifts you receive. You may also be able to negotiate a personal loan from parents or a family member to put towards your down payment.

Learn about government perks

Home Buyer’s Plan (HBP). You can withdraw up to $35,000 tax-free from your Registered Retirement Savings Plan (RRSP) through the HBP to put towards your new home. This amount will be repayable in installments back into your RRSP over 15 years.

First-Time Home Buyer Incentive. This federal program was introduced in September 2019 to help first time homebuyers reduce their mortgage payments and help reduce the total interest paid over the life of the loan. It’s available to households with an income of $120,000 or less and offers a loan of five to 10 per cent of a home’s purchase price to put towards the down payment. The incentive is repayable when the property is sold or after 25 years, whichever comes first. A potential drawback of this program is that repayment is based on the fair market value of your home at the time – if it increases in value, you’ll pay back more than you borrowed.

First-Time Home Buyers’ Tax Credit. New homeowners can claim a non-refundable tax credit of up to $750 to cover closing costs.

GST/HST New Housing Rebate. If your home is a new build and cost less than $450,000 you may be able to recover a portion of the GST and HST that you paid. Your province may also offer rebates on the provincial portion of the GST or HST.

Land transfer tax rebates. Some provinces and municipalities (for example, Ontario, British Columbia, Prince Edward Island and the City of Toronto) offer rebates on the land transfer tax for qualifying buyers.

Explore your mortgage options

When shopping for a mortgage, there’s more to consider than the rate. That’s why it’s so important to seek help from a professional. For example, a flexible mortgage that allows you to make prepayments can help you pay off your mortgage sooner and save on interest in the long run.

Think about your personal situation – if the possibility of rising interest rates makes you nervous, you might be more comfortable with a fixed rate. If you’re expecting changes to your financial situation, an open mortgage may be ideal. You can also customize your mortgage by splitting between a fixed and variable rate and an open and closed mortgage.

Get pre-approved

Before applying for a mortgage pre-approval, it’s a good idea to review your credit rating and report any errors. You can request a copy of your credit report once a year for free from Equifax Canada (www.equifax.ca) or Transunion Canada (www.transunion.ca).

With a mortgage pre-approval, your lender will let you know how much they are willing to loan and the estimated size of your payments. The current interest rate will also be locked in, so you’re protected in case rates increase before you purchase your home. They will also apply the mortgage stress test to ensure you can make your payments if interest rates rise. The stress test is set at two percentage points above the actual mortgage rate or the Bank of Canada’s posted five-year rate – whichever is higher.

It’s important to note, a mortgage pre-approval is not a guarantee that the lender will grant you the mortgage. When it comes time to make an offer on a home, it’s a good idea to insist on the condition of financing – it protects you in the event your financing falls through. If you waive it, you could lose your deposit and risk being sued by the seller.

Don’t shop alone

Buying a first home can be an exciting and challenging task but knowing what to expect can make it easier. A team of experts including an advisor, mortgage professional, real estate agent and home inspector can help you figure out your options and ensure you’re making the best purchase decision possible.

Mortgage basics

• Principal is the amount of money you borrow to buy your home. With every mortgage payment, some of the money will go to paying down the principal and some will go to interest.
• Mortgage term is the length of time you’re committed to your lender, the rate and any conditions – five-year terms are most common, but you can choose anywhere between one and 10 years.
• Amortization period is the length of time before you pay off your mortgage, up to 30 years. The longer the amortization, the lower your mortgage payment but you will pay more interest over the life of your mortgage.
• Open term mortgages allow you to pay back what you borrow at any time, without penalty. Because of this flexibility, interest rates are generally higher.
• Closed term mortgages do not allow you to pay back the entire balance without penalty, but many offer some prepayment options to help you pay down your mortgage sooner.
• Fixed interest rates will not change during the term and your payments will stay the same.
• Variable interest rates are usually lower than fixed rates but are subject to fluctuations.
• Mortgage insurance is needed if you have less than 20% for your down payment. This insurance protects the lender in case you can’t pay your mortgage.

¹  https://abacusdata.ca/rented-dreams-the-truth-behind-millennial-home-ownership/

² Ibid.