Hey there, time traveller!
This article was published 5/10/2012 (1597 days ago), so information in it may no longer be current.
Census data from last month reveal a trend that should come as little surprise to many baby boomers:
Canada's 20-something demographic is failing to launch.
You don't have to tell that to the parents of the thousands of late-20-something Canadians -- about one in four of them -- still living at home.
It's not that these young adults are listless layabouts. Instead, the more likely scenario these days is they're living at home so they can save for their future.
And many aren't waiting for the love of their life to come along before taking the plunge into home ownership. A good number are going it on their own, says Farhaneh Haque, director of mortgage advice at TD Canada Trust in Toronto.
"You don't have to look very hard," she says. "There are a lot of single young people in the market."
According to TD's own research, about 55 per cent of men and 30 per cent of women buy their first home on their own.
Census numbers seem to confirm this trend. For the first time ever, Canada has more single households than households with couples who have children.
Although record-low borrowing rates have made it easier to finance buying a home, going it alone is by no means an easy path to home ownership.
"You really need to be good with savings, because when you're a single buyer, as opposed to a couple, the responsibility of all the mortgage debt falls on just you," Haque says.
But it's more than just being able to pay the bills. Just getting your foot in the financing door is tough. Real estate prices keep rising while incomes remain relatively stagnant.
The average cost of a Winnipeg home was about $96,000 10 years ago. Today, it's $245,000. Even condos -- often the first choice for the single buyer -- are getting pricey. They run about $186,000.
In contrast, incomes have increased only modestly. In 2002, the average income for singles in Winnipeg was about $26,000 a year. In 2010, the latest data available, it was about $28,000.
No hard data exist to explain why a quarter of Canadians in their late 20s still live with their parents -- a number that's more than doubled since 1981.
But based on what Winnipeg mortgage broker Rosa Bovino hears from her young, single, first-time homebuyers, the reason is pretty clear: the increased cost.
"I think people are still living in Mom and Dad's basements so they can save more money for a down payment."
Yet it's not just the high price of real estate. Changes to Canada Mortgage and Housing Corp. (CMHC) rules for lending haven't made it easy on first-time buyers, single or attached, says Bovino, a broker with Invis. Over the last four years, the federal finance minister has tightened lending rules to cool off an overheated real estate market, fearing a U.S.-style subprime housing crisis developing in Canada.
The most recent change kicked in July 9, reducing the maximum amortization period to 25 years from 30 years.
It's the latest in a series of amortization-rate decreases from the all-time high -- a 40-year amortization mortgage, which the government announced in 2006 specifically to facilitate buying a home for first-time buyers in markets where prices have soared.
Also long gone is the ability to get CMHC backing for a mortgage with no down payment. Since the summer of 2008, homebuyers need a minimum of five per cent down to qualify.
Despite these hurdles, many single Canadians are still qualifying for mortgages because they've been able to get their financial house in order, Haque says.
Her advice to would-be first-time buyers is to get used to pinching pennies.
"No. 1 is you want to save aggressively for as big a down payment as possible to make your monthly mortgage payment more affordable," she says.
Even with the minimum five per cent down payment in hand, however, more cash is required to cover a long list of additional expenses in completing a real estate deal. Among the many extra costs are the land-transfer tax and paying movers and lawyers.
Lenders are concerned about more than the upfront cost of ownership. They want to know whether you can afford to live in your new home. To determine affordability, they measure your monthly income before deductions against monthly housing costs, which include the mortgage payment, property taxes, utilities and condo fees.
"CMHC recommends those costs to be about a third of your gross income," Haque says.
Long before you get to the mortgage-discussion stage, it's also good to familiarize yourself with your credit history, says Julie Hauser, spokeswoman with the Financial Consumer Agency of Canada (FCAC).
In Canada, two for-profit credit bureau agencies -- Equifax and TransUnion -- monitor Canadians' borrowing habits. They'll charge you a fee to have a peek online, but you can get a credit report free by picking it up in person or having it mailed.
"A credit report is a picture of your financial history, how you pay your bills," Hauser says. "And it lets lenders see what kind of borrower you are."
A report isn't the same as your credit score. You have to pay for that, regardless of how you choose to access it. But your score, which ranges between 300 and 900, is based on your report, and it provides a quick snapshot to lenders of your creditworthiness.
Bovino says most potential buyers need at least a score of 600 to qualify for a mortgage. "On average, I would say a 650 credit score is pretty average for first-time buyers coming out of school with debt," she says.
The next step is pre-approval. With the down payment and a history of creditworthiness, you'll often be pre-approved based on your ability to pay the mortgage and other housing costs.
But Bovino says she gives clients two figures. One is based on debt load and the other reflects what clients are comfortable paying, which may be a higher percentage of their income.
"This way, they have a better understanding of their risk tolerance when they're going out shopping for a home," she says.
"The reason being bidding wars, so if you do fall in love with a house, you can make those adjustments to compete based on payments you're comfortable with."
If buyers go a little overboard, the mortgage insurer -- CMHC, for example -- might only insure up to a certain level and ask the buyer to put up additional money for a down payment.
Bovino says buyers' parents often step in to help at that stage or even earlier.
After all, many parents don't just want to see their kids happy in a new home.
They also want their basements back.
Five or 10 per cent down -- what's the diff?
Most financial advisers will tell you to save up as much as possible for the down payment. But when it comes down to waiting a couple of years to squirrel away enough cash for a 10 per cent down payment instead of the minimum five per cent payment, the numbers don't show much advantage over 25 years. With five per cent down on a $187,000 condo, for example, the mortgage payment is about $845 a month. Interest costs are about $76,000 over 25 years, based on about a three per cent mortgage rate. With 10 per cent down, the monthly mortgage payment is about $800 and interest costs over 25 years would decrease about $4,000.
Rent or buy?
After more than a decade of rapidly increasing real estate prices in Winnipeg, one might wonder whether renting is the better option until the market cools -- or maybe even pulls back a little. Here's a look at some numbers:
-- For a home worth $250,000, with five per cent down, the monthly mortgage payment would be $1,110 at 2.89 per cent interest on a five-year fixed.
-- Renting a bachelor in central Winnipeg, which has among the lowest rental rates, costs at least $451 a month. The lowest-cost apartments are in north downtown Winnipeg. The farther you get from downtown, the higher the rent. But pickings are slim for bachelors and even one-bedroom suites. One-bedrooms are in the $550-to-$700-a-month price range for rent.
-- Winnipeg Rental Network; RateSuperMarket.ca
Beware of rising rates
Low interest rates have been the norm for more than a decade, and in the last four years, they've been lower than at any other point in history. But the low-cost-money policy will eventually gain economic traction, leading to inflation. Then interest rates will rise to slow down inflation. Undoubtedly, many homeowners with big mortgages will feel the pinch. This week, the Financial Consumer Agency of Canada cautioned Canadians about vulnerability to interest rate hikes. It offered the following example to demonstrate the effect on a homeowner.
A household with a variable-interest-rate mortgage of $277,658 at 3.1 per cent interest has a current monthly payment of $1,405.
If interest rates increase, here's what can happen to the monthly payments:
-- 0.5 per cent interest rate hike: Monthly payment rises to $1,477
-- One per cent interest rate hike: Monthly payment rises to $1,550
-- Two per cent interest rate hike: Monthly payment rises to $1,702
-- Three per interest rate hike: Monthly payment rises to $1,861
This household could face elevated mortgage payments from $72 a month (or $864 a year) to $456 a month (or $5,472 a year).