Buying a home in the current real estate market can be a struggle. This is especially true for millennial buyers trying to break into homeownership for the first time. Many feel the deck has been stacked against them, and for good reasons.
Housing prices have soared over the last decade, pushing the dream of homeownership out of reach for many people.
The problem doesn’t end with high purchase prices. As the cost of housing soars, rental costs also increase. Millennials and older members of Generation Z find themselves facing an unfortunate catch-22.
Why Everyone Should Own A Home
Everyone and their uncle tells them about the importance of saving for a down payment on a house. It makes sense. A home is a valuable asset that gives you the chance to build equity and can shield you from economic uncertainty. And once you’ve paid off your mortgage, you’re in the clear. Your most significant expense becomes a thing of the past!
But the high cost of renting makes it nearly impossible to make ends meet every month. Saving up tens of thousands of dollars for a down payment can feel impossible.
The last true Canadian buyer’s market took place in 2008, long before millennials were even old enough to consider buying a home. Since then, housing prices have risen steadily.
Looking for creative ways to make your first home purchase more affordable? Think like an investor! These articles may help:
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In early 2019, the Bank of Canada dropped the target interest rate to a historic low. For many, this represented a chance to be able to afford a mortgage even with high housing prices. The low cost of borrowing helped to balance the scales. This reprieve was short-lived, however. You know the rest of the story.
These ultra-low rates triggered an unprecedented demand for housing and caused prices to skyrocket to record-breaking levels. Multiple buyers competed with each other over very few available listings. Buyers often had to bid hundreds of thousands of dollars over asking – and sometimes they still lost!
What Current Conditions Might Mean For First-Time Buyers
Now, the markets have shifted once again. The out-of-control real estate market was unsustainable.The Bank of Canada announced the first in a series of interest rate hikes to try to cool things down.
Then, the Ontario government announced legislation to discourage foreign investors and house-flippers, and the market slowly started to normalize.
At the moment, first-time buyers are still in a difficult position. Though housing prices have dipped, they remain out of reach for most millennials. And higher interest rates make it harder to qualify for financing.
However, prices could still fall even further. If so, first-time buyers will have their first edge in years. Rising interest rates will factor in, but there are ways to minimize their effect, including:
- Make the largest down payment you can afford. The more you pay upfront, the less you have to borrow. Your monthly payments will also be lower. In addition, a larger down payment increases your chance of qualifying for a mortgage.
- Understanding your financing options. Your bank will likely have various options to help make your payments affordable even as interest rates rise. You may have a lower payment over a longer term. A fixed-rate locks in your interest rate, protecting you against further increases. Variable rates are often lower, but you’ll need to be flexible and budget for fluctuating monthly payments.
- Take the stress test. This ensures that you will be able to afford your payments even if interest rates rise.
Government Programs For First-Time Buyers
As housing prices climb, the government has been under pressure to help people break into the market for the first time. As a result, there are several programs designed to help make your first home more obtainable. Here is a quick overview:
First Time Home Buyer Incentive
This shared equity program can help you with your down payment on your first house. The federal government puts up 5% of the value of a resale home or 10% of a new build. Combine this with your own savings, and buying your first home can be more affordable than you realize!
You will have to repay the loan when you sell your property or after 25 years, whichever comes first.
There is no interest on the loan, but the government takes a percentage of the value of the home.
- If the house appreciates, you’ll have to pay back the incentive, plus a maximum gain of 8% per year.
- In the unlikely event that the house loses value, you’ll have to pay back the incentive minus an 8% loss per year.
One of the most common questions from first-time buyers is “How do I finance my purchase?” Your questions are answered below:
- Common First-Time Buyer Questions – Answered By A Mortgage Specialist
- Tips On Selecting A Mortgage Agent
- Why It’s Important To Get Pre-Approved For A Mortgage
Home Buyer’s Plan
You can always withdraw funds from a tax-free savings account to help fund your down payment. However, drawing from an RRSP before retirement typically has steep tax penalties. But under the home buyer’s plan, you can take out $35,000 tax-free to put toward the purchase of your first home.
First Time Home Buyers’ Tax Credit
As a first-time buyer, you likely qualify for a tax credit to help offset your expenses. This credit allows you to claim up to $5000 on your income tax, resulting in a savings of $750.
Resale homes are not subject to tax, but the GST and HST on new builds can add up quickly and often must be paid upfront. First-time home buyers can qualify for a rebate when buying a newly constructed or significantly renovated home as their primary residence.
Land Transfer Rebate
The land transfer tax is a significant part of your closing costs when buying a home, and you cannot include it in your mortgage. Fortunately, the provincial government offers a rebate for first-time buyers that covers up to $4000 on the tax. To qualify, you must be at least 18 years old and cannot own property anywhere in the world.
Buying your first home can be an intimidating experience. However, the changing market combined with government programs may represent the best opportunity you have had for a long time.
Are you ready to break into the real estate market? We can help guide you every step of the way and find the right home for you. Find out more about our comprehensive buying process right here.