It’s no surprise that young people today can have a tough time coming up with a decent size down payment that will get them on the monopoly board of Metro Vancouver real estate.
With the average home price in Metro Vancouver registering more than half a million dollars, you could hear them issue a collective sigh of resignation as they crunch the numbers to find the necessary down payment can easily hit six figures.
I recently helped my two girls to buy their first homes and I’m happy to share some of my experiences to help other parents and first-time buyers making this important purchase.
When I saw my daughters struggling to put together sizeable down payments, I stepped forward and offered financial help, which I think made it easier for them and allowed me to help them secure their future. For reasons I’ll explain later, I, like most parents, made my financial help a gift rather than a loan. Here are some of my tips from going through the experience twice and from helping other first-timers and their parents:
1. Rent or Buy?
There has been lots of discussion in the media suggesting young people should forget about buying, and instead look to rent a home and put their money in other investments. I couldn’t disagree more. Owning one’s home has long been, is now and will be a long time from now, the best way for the average Canadian to build financial security and stability in their lives. Unlike other investments, which can take very specialized knowledge and expertise, buying a home is within the reach of many young adults if they take a realistic approach (see REW.ca’s article on “Buy Vs Rent: Which is Better Long Term?”).
2. Should Young People Ask their Parents for Help?
Once they have made the decision to buy, the first-time buyer has to get their down payment in place. As a Realtor, I always take young people through the process of figuring out how much they can afford, first asking them how much they have to put down. If that is an issue, then I explore with them their options, including the possibility of approaching their parents for financial help. Noted Vancouver condo marketer Bob Rennie estimated this year that 45 per cent of first-time buyers approach their parents for help, so it’s very common.
3. Bank of Mom and Dad: Loan or Gift?
I gave my daughters a gift because I didn’t want to put an extra financial burden on them of making yet another monthly payment. Personally, I see lending the money as a more complicated process, both financially and emotionally. But many parents cannot afford to do this – very often the funds will have to come from retirement savings, and will need to be paid back. If so, ensure you have a solid, business-like agreement in place for the repayments, including how much and how often, so that everyone’s expectations are aligned. And then stick to it! (More on the legal ramifications of the Bank of Mom and Dad here.)
4. Use a Mortgage Broker
I told my girls – as I tell all my clients – to first get pre-approved for a mortgage once you know how much you have to put down. I suggest using a mortgage broker to do that as they often get better deals on rates than even one’s own bank is willing to offer. There is a lot more to mortgages than interest rates and that is where you can benefit from a mortgage broker who shops your loan around to several financial institutions. And get the mortgage pre-approval in writing.
5. Use a Realtor
A Realtor can be the best asset a first-time buyer can have. An agent representing a buyer knows the market, knows properties, can provide invaluable advice on the buying process, can negotiate the best price, and is objective during what can be a very emotional experience. Most importantly, it doesn’t cost the buyer a penny because it’s the seller who pays all agent commissions.
6. How Much to Spend?
I suggested to my daughters that they think about what sort of lifestyle they want to pursue as they become homeowners. For instance, if they want to travel, go out to dinner, etc., then perhaps they shouldn’t spend to the top of their pre-approval home price.
7. Is Renovating Realistic?
When it came to renovating, I advised my daughters to be very cautious. A first-time buyer has just spent a lot of money to buy a home. I’m not talking about minor things like putting on a fresh coat of paint, which can be a do-it-yourself project.
But when it comes to more involved and expensive renovations, it’s best to live in the property for a few months. What you thought at first was so important to change may turn out to be not so important after all.
8. When to Trade Up
Some young people are impatient and consider moving up to a better home after just one or two years in their first home. My advice is, “You’re young, you have time. It’s not worth it if moving up means compromising your lifestyle or putting a strain on your relationship.” A first-time buyer should only consider moving up when the current property has increased in value and selling could push them up to the next level.
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