WealthBar’s Life & Money section offers practical advice for Canadians at every stage of their financial journey. Today we look at a hot topic: how people who are often just starting to save can buy into Canada’s pricey real estate market.
First time home buyers in Canada are getting kicked to the curb before they can get their key in the door. Sober observers decry this wild west freak show as investors try to flip homes for a profit, while the youngsters are stuck renting.
Not that renting is always a bad thing. Sure, building equity is a great thing to do. But paying interest hand over fist for a tiny home won through a costly bidding war is not ideal.
Still, the angst is rising among those who are looking to start building a financial future with a literally solid foundation. “Basically, I’m sick of living in a basement,” noted one 31-year old living in Greater Vancouver in an aptly-titled Globe & Mail piece: Millennial B.C. buyer: ‘I’m sick of living in a basement’.
For the smart first time home buyer who is determined to get a starter home, all is not lost! We talked with some Canadian real estate experts. They told us how they would advise first time home buyers looking to get into this hot real estate market.
Creative ways to help first time home buyers pay for their own slice of paradise
“First-Time home buyers can use up to $25,000 in their RRSP towards their down payment,” said Keller Williams Edge Realty realtor Paul Lisanti. That’s already on most buyers’ radar. What about thinking outside the box?
“There are also rent-to-own opportunities where tenants usually pay a small down payment and slightly above-average rent prices,” Lisanti said. “After two or three years, the extra payments are totaled and credited to the tenant. That goes towards their purchase down payment.”
Younger buyers starting out may be disappointed by what their money can buy. That’s true even if they have good jobs and have been diligently saving.
What about pooling resources with trusted friends? “Two families could share a multi-unit home with a pre-written agreement to refinance after 3 or 5 years.”
Are you handy? Be prepared to put in some sweat equity
“When you are new to the market, try and look for properties where you can add value,” said Sotheby’s International Realty Canada Senior VP of Sales Richard Silver, past president of the Toronto Real Estate Board. “Stop searching for the perfect house and buy the imperfect house.”
Put those DIY skills to good use, or get a reliable contractor who can help you fix up your property cost-effectively. “Finish the basement, add a third floor, or make other improvements. Buy under what you can afford and add value.”
Avoiding the house-rich, cash-poor problem
A common issue with first time home buyers is that they max out what they can afford for housing. That leaves them with no spending money. “One way buyers can play it safer is to choose a mortgage with the lowest payments,” Lisanti said.
“Many mortgages allow for an additional 10 percent per payment and one lump-sum payment of 10 percent of the amount of the mortgage per year. Anything paid above the minimum payment reduces the remaining balance of the mortgage. Rounding up mortgage payments to the nearest 10 or 100 would help reduce interest payments too.”
Realistic budgeting is critical, Lisanti noted. “I’ve had several clients who bought a house and a year later had to replace one of their vehicles. I had suggested that they choose a mortgage with the lowest monthly payment. That way, they were able to afford the monthly costs of the mortgage and the vehicle financing.”
Don’t let emotions cloud your judgement when buying a home
One feature of Canada’s hot real estate market: bidding wars. Multiple offer situations are exceedingly common. Inexperienced first time home buyers may wind up getting extremely competitive. They bid the price up far beyond the home’s real value.
“If you insist on competing in multiple offers, then set a budget beforehand,” said Vancouver realtor and Vancity Condo Guide founder Steve Saretsky.
“Go in with what you feel the home is worth. For example, let’s say a condo is listed at $499,000. You say, based on the recent sales and what I feel it’s worth I’d be willing to pay $525,000. If that’s the number, stick to it! I’ve seen numerous clients lose patience, get overly competitive and bid way over their budget. You don’t want to have buyer’s remorse!”
One final tip from us that most first time home buyers might not be aware of: you can negotiate the total fee with the realtor. House prices are much higher than they were 20 years ago, but most realtors are still taking the same default percentages. We highly recommend looking into that as a way to get the most out of your money!
Home ownership is an important part of your overall financial picture. Want to speak to an expert about your investment portfolio? A WealthBar financial adviser can help.