Many first-time homebuyers have been forced to sit on the sidelines throughout the pandemic, unable to break into a market with record-high prices and outrageous bidding wars. To cool the overinflated market, the Bank of Canada raised interest rates in 2022, making it even harder for new buyers to afford the tighter stress test (they currently have to afford a rate increase of 2% or a mortgage rate of 5.45%, whichever is higher) and a higher-interest mortgage. But, as we learned during the pandemic, sometimes adversity requires a shift in mindset.
Young adults today need to be equipped with $100,000 or more for a down payment for their first home, so we’re seeing a new trend of the young adult home buyer receiving financial assistance from parents or grandparents to make up the difference. Parents feel that home ownership is important and want to see their children enter the market, so they are using the equity in their homes to gift children the down payment as an early inheritance.
Duncan Harvey from Berkshire Hathaway Home Services West Realty in Oakville says it’s unusual to see a young adult buying a home on their own today. “The approach to home ownership is very family oriented compared to a few years ago,” explains Duncan. “Parents and grandparents are active participants in a young adult’s first home purchase. They are using family wealth or gifting an early inheritance to help with the down payment.”
Many parents of first-time home buyers are tapping into the equity of the family home and using a line of credit to help with the down payment. “When down payments can be $120,000 or more, even two adults with good jobs are going to struggle to save that money.” Most collateral lines of credit are about half a point over the prime rate and are repayable on a flexible schedule, making it an excellent option for families. There are also options to re-mortgage the family home or take out a reverse mortgage.
Duncan also shares that some families are allowing their adult children to rent a portion of their house and are putting the rent into a savings account for a down payment in a few years.
“The mindset with many older millennials has been that they could rent forever and maintain a nomad lifestyle, but that’s changing,” Duncan says.
As rental prices continue to rise and the value of home ownership increases, more and more families are working together. In some cases, adult children have moved back home to save money, or parents have sold the family home and are buying a new home with living space for both parents and adult children. Homes with separate living quarters, specifically with a separate entrance, remain a hot commodity.
And while generational wealth continues to be the go-to option for young adults, several incentive programs were recently implemented to help first-time home buyers. Federally, the government now allows you to withdraw up to $35,000 from your RRSP as part of the Home Buyers’ Plan (HBP). And the CMHC, in partnership with the Government of Canada, implemented the First-Time Home Buyer Incentive, which allows you to save up to $40,000 tax free to buy your first home.
Provincially, the government has also recognized the importance of providing housing relief to encourage young people to stay in Ontario. We witnessed a significant exodus during the pandemic as Ontario became too expensive, and many people moved out of the province, taking their valuable working skills with them. First-time homebuyers will get a break from land transfer taxes and some builders also exempt first-time home buyers from development charges.
As with many facets of life in a post-pandemic 2023, we must shift our ideas and mindset to embrace new realities. Real estate is no different.
By Julie Achtermeier
Duncan Harvey
Branch Partner & Broker
Berkshire Hathaway Home Services West Realty
905.510.5995
duncan@bhhsoakville.ca
