Winnipeg Free Press - PRINT EDITION

The first-time homebuyer's dilemma

Low interest rates aside, millennials hunting for a home face sky-high prices

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Marnie Barnabe knew she would be facing steeper prices moving from her home an hour out of the city to a new development in Waverley West.

The 27-year-old federal civil servant bought her childhood home five years ago for $85,000 and figured she would have enough equity to upgrade -- even if that meant buying a townhouse with less square footage.

And yet, she still experienced sticker shock.

"I never pictured myself spending this much," she says about the townhouse, worth about $230,000 and currently under construction.

She says upgrading will likely double her mortgage payments, even after she makes a large down payment using the proceeds from the sale of her current home.

But the price tag wasn't the only sting. Her financial institution turned her down for a line of credit to make a deposit on her new home while it was being built.

"I had been banking with them all my life," she says. "All my debt combined is under $100,000 so for them not to be able to give me a $15,000 line of credit to buy this house, when I make good money and have never been late on payments, it's a little ridiculous."

Barnabe found another bank willing to give her the line of credit, and now it's a matter of selling her current home and waiting for her new one to be completed.

Yet many millennials -- the under-35 crowd -- are often facing several more financial obstacles to home ownership than Barnabe.

A recent survey by TD Canada Trust found more than half of those who would like to buy a home are struggling to come up with a down payment, in large part because of soaring real estate prices over the last few years.

"Millennials are facing high prices, lower income and because they've stayed in school longer, they often have to service student debt," says Farhaneh Haque, director of mortgage advice, TD Canada Trust in Toronto.

"They have three different obstacles they're facing when they're getting into the market, so they often start contemplating whether it's better to rent than owning."

Low interest rates have made their borrowing costs lower than almost any other point in the last several decades, but the rock-bottom rates have a downside.

Because more people are enticed to get into the market -- the result of the attractive rates -- demand has increased substantially, pushing up prices to the point where first-time buyers are starting to wonder how much is too much. Furthermore, mortgage-rule changes over the last few years, such as eliminating no-down-payment lending and reducing 40-year amortization to a 25-year time frame with a five per cent down payment, have also made it more challenging.

Still, Winnipeg mortgage broker Jeff Moore says if young buyers keep their sights relatively low, they can come out ahead compared to renting.

"Often in this interest-rate environment, it's less expensive to own, at least from a monthly payment perspective," says Moore, a partner with Castle Mortgage Group. "For example, on a $200,000 mortgage, the payments are less than a $1,000 a month and to try and rent a house that is worth $200,000, it will probably cost you north of $1,200 to get something decent."

But the $200,000 price tag is getting harder to find in the city. According to Royal LePage for the last quarter, the average bungalow price was about $302,000 and a standard condominium unit was about $194,000.

The key for house-hunters is to run the numbers to make sure they don't buy more than they can afford over the long term, Haque says.

"It's fantastic that they're trying to realize their goals, but there's a huge difference between being a renter and an owner."

It's not just the mortgage payment. It's the property taxes, the closing costs for purchasing the property, the utilities, the regular maintenance, home insurance and then major repairs such as a conked-out furnace in January.

Moore says the typical measuring stick lenders use to determine borrowers' affordability is the percentage of their gross income needed to keep the roof over their head.

"In the traditional sense, the lending guidelines are, 32 per cent of your gross income is what you could spend realistically on the mortgage, property taxes and utilities."

Using this measure alone, house-hunters often get pre-approved for a mortgage higher than they had anticipated, he adds.

"It's always a bit of a balancing act because I've had people say 'I don't want to spend more than a $1,000 a month on my mortgage,' " he says. "Well, that means that you can't go... more than $200,000, yet through a lending institution, I might be able to get them to qualify for $300,000, which kind of blows them away."

Some may choose to mortgage themselves to the limit. Others are more conservative.

"I would say the biggest difference is lifestyle. I might have two clients who earn the same amount of money and debt," he says. "One client likes to spend a lot on their entertainment budget, so they may not want to spend as much on a house."

But as prices continue to climb, many are paying more than they had expected.

The market increases have been part of a long-term, accelerating trend since interest rates started falling in the early 1980s.

"In 1982, the average price of a home in Winnipeg was $51,294 and you look at the average price in 2012, it's $255,000," Haque says.

That's more than triple the increase in the median family income. Statistics Canada data show the average family household income in Manitoba was $23,800 in 1982. Today, the median household income in Manitoba is about $63,000.

At some point, the market will cool and return to the historical norm of slow, steady and small increases, says Moore. That may come soon when interest rates inevitably increase, pushing up borrowing costs for would-be homebuyers and existing mortgage-holders alike.

Although Winnipeg's real estate market is unmistakably booming, it's unlikely a bust will lead to a substantial price decrease, Moore says. Still, the topic of a drop in values does often come up with clients; that they could purchase only to see their home worth less than what they owe shortly afterward.

"A negative equity position will only affect you if you have to sell the property," he says. "But a lending institution is interested in keeping you in a mortgage as long as you keep paying."

For Barnabe, a drop in value once she takes possession has not been a big concern. She's buying for the long haul.

Instead, simply coughing up the down payment has been her biggest challenge.

"I thought I had a good amount of money saved but I guess I didn't," she says. "Even talking to co-workers who are looking at buying, who thought they had enough saved, I've been telling them to save more because you never know."

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Quick facts

Thinking about getting into the market? Here are some tips from Winnipeg mortgage broker Jeff Moore.

Know your credit score: Ranging from 350 to 900, a credit score is a measure of your borrowing history -- how much you've borrowed, how quickly you paid it off and how often you have missed payments. A minimum credit score to get a five per cent down mortgage is 600, he says. "And about average credit score would be 700-plus."

Save more than the down payment: Putting down as much cash as possible on the home is always a good idea, but you also need to keep in mind the additional costs of purchasing a home. "You need to cover the closing costs and legal fees, too," he says. "I tell people to estimate about two per cent of the purchase price to have set aside for the lawyer and administrative costs." The biggest cost is the land-transfer tax. On a $250,000 house, that will run about $2,700. Keep in mind these costs cannot be covered with borrowed mortgage money, he adds.

Get pre-approved and aim lower: Even if you're pre-approved for $300,000, that doesn't mean you should look at homes in that price range. It's your upper limit, so it's best to look at lower-priced properties so you have room to bid above the list price if necessary. "The hardest part of buying a house today is competition," he says. "We're seeing multiple bids on properties and selling for over the list price."

Stabilize your life: The longer you have a steady job, the more likely lenders will approve you for a mortgage. Don't make any other large purchases before applying for a mortgage, either. This will reduce your debt servicing ability for a mortgage, Moore says. "For example, if you're looking for a house, don't buy that new car just yet because those big expenditures will affect your ability to qualify for a mortgage."

Republished from the Winnipeg Free Press print edition May 4, 2013 B10

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