The Bank of Mom and Dad – For first-time Home Buyers

Table of Contents

Despite the current state of the housing market – rising mortgage rates and low supply – the dream of homeownership is still very much alive for Gen Zs and Millennials.

A recent survey by Royal LePage found Millennials were optimistic about owning a home, with 6-out-of-10 believing they will be able to buy a house in the future. In fact, 68% of those between the ages of 26 to 41 say buying a house is an important life goal. 

The question is, when will they be able to do it? 

For the past 6 months, home sales have edged lower according to the Canadian Real Estate Association (CREA), another sign the rising cost of borrowing is taking a toll. There is little doubt higher rates will continue to have a chilling effect on consumer spending and, notably, the mortgage market. Both Bank of Nova Scotia and Desjardins expect home prices to fall 23% from their peak to the end of next year. 

Yet, I still think it is very difficult to time the real estate market. No one with absolute certainty knows the exact moment the current tide will turn. In other words, rates could head lower or stabilize, supply could increase, or prices could reverse course and head higher.

Given all the potential variables challenging the current environment, the harsh reality remains that, unless they have a substantial amount of money saved or can withdraw from the Bank of Mom and Dad, it is going to be near impossible for a young first-time buyer to buy a home.

And for the record, no amount of cutting back on lattes and avocado toast alone is going to help young Canadians get into housing markets across the country.

The reason – we have an affordability crisis in Canada. 

Does this mean you should give up on the dream of home ownership? Absolutely not, it simply means your dream might not be realized as quickly as you hoped.

First time home buyer tips 

For those looking to buy their first home, here are a few things to consider:

  1. Get to know your numbers well, really well. Before you make the biggest purchase of your life, you need to have a solid understanding of your financial status. That means knowing with clarity how much money you have coming in, your expenses, and your savings. What can you really contribute to a down payment and still afford to live?

Beyond just saving for the down payment, I have seen many first-time home buyers become financially overwhelmed because they were surprised by unexpected costs. In addition to the down payment, you need to factor in closing costs, legal fees, appraisal fees, and miscellaneous expenses once you move in. Ask your mortgage provider to list anticipated costs in detail. 

As well, ask yourself, if rates continue to go higher what sort of impact will that have on your lifestyle? It doesn’t necessarily mean you have to sell but compromising even in the short-term isn’t for everyone.

  1. To save yourself from heartache, disappointment, and unrealistic expectations, I would advise you to get pre-approved for a mortgage before you start combing through real estate listings. This will help to guide your expectations on what you can truly afford. You may have been pre-approved in the past but it likely was under different economic conditions. Time to update it and confront your financial facts.

A word of caution – you may still qualify for more than you need but try not to be tempted to buy beyond your comfort level. With rising mortgage rates, what you can afford today might not be possible if rates continue to climb.

  1. For many Canadians, the reality of being able to afford a detached, new, or renovated home in one of Canada’s urban centres is disappearing. Be open to the idea of looking outside large urban cities and don’t rule out buying a fixer-upper.
  2. The bitter reality of the housing market today has forced many to turn to the Bankof Mom and Dad. Canadian Mortgage Trends reported that roughly 40% of parents have helped their children buy their first home. Some parents might suggest it is an early inheritance, others may be fortunate enough to have excess cash on hand, and others will explore a reverse mortgage and consider taking some of the equity out of their own home to contribute to their child’s. The sole purpose, regardless of the option, is to help the next generation get into the housing market. 

If you are still on the sideline, eagerly and aggressively saving for that down payment, luck might be on your side. Many believe a housing market correction is long overdue. For now, mortgage rates are climbing, inflation is still stubbornly high, and there are many households that are feeling the financial pinch. If the debt burden continues to climb, there will be some forced to sell, resulting in more supply coming on the market. Inflation will ultimately be tamed, and rates will stabilize.

But don’t lose sight of the dream, and now is the time to get your financial house in order. 

Oh, and try to remember the proverb, “patience is a virtue”.

~ Pattie Lovett-Reid

Chief Financial Commentator

HomeEquity Bank