According to a new BMO housing survey, a large portion of first-time homebuyers are willing to make financial sacrifices in order to purchase property.
Thirteen per cent of first-time homebuyers plan to buy a home that costs more than 30 per cent of their annual income. Additionally, 40 per cent of those seeking to purchase property for the first time are open to making other sacrifices in order to secure a more expensive home.
READ: Millennials Look At New Routes To Home Ownership
The major challenge facing first-time homebuyers is coming up with the funds for a down payment. The minimum amount needed to purchase a home is five per cent of the total value. Twenty-six per cent of first-time homebuyers believe this is a significant hurdle to purchasing property.
Not everyone is in a financial position to come up with the minimum amount of money necessary for a down payment. Of those polled, only 14 per cent of homebuyers are in a position to make a down payment. In fact, 55 per cent will secure the funds needed within two years’ time. And only 38 per cent of prospective homebuyers will be debt-free ahead of their purchase. This means most people surveyed will bring debt with them into homeownership.
READ: Everything You Need To Know About The First-Time Home Buyer Incentive
With the launch of the federal government’s new First-Time Home Buyer’s Incentive (FTHBI), 86 per cent of those surveyed believe this program will be beneficial to their home ownership goals. FTHBI seeks to make the process of buying a home in Canada’s hottest real estate markets more affordable by reducing the cost of monthly mortgage payments. On the older end of the millennial generation, 50 per cent of people in their thirties believe FTHBI will benefit them in their pursuit to own a home.
“While first-time homebuyers believe that market conditions are favourable for buyers, it’s important to make sure that carrying the costs are sustainable,” said Hassan Pirnia, Head, Personal Lending and Home Financing Products, BMO Bank of Montreal.
READ: 7 Questions Buyers Should Ask Their Mortgage Lenders
While the government's mortgage stress tests are cooling down over-heated housing markets, young buyers are being priced out of them. In major Canadian housing markets, young buyers at the beginning of their careers who have lower salaries are unable to put down 20 per cent payments. This percentage or higher is needed to qualify at the Bank of Canada's benchmark rate. Additionally, uninsured mortgages are stress-tested at an even greater benchmark rate or the contract rate plus 200 basis points.
Ontarians are the most pessimistic when it comes to buying their first home. According to the Toronto Star, this is likely due to B20 mortgage rules having a greater impact on homebuyers in the province when it comes to how much people can borrow. In Alberta, 53 per cent of people think it's a great time to buy. This optimism stems from the fact that housing and oil prices have dropped, making purchases easier to afford.
READ: Buyers: How To Maximize Your Down Payment Savings
BMO Economics suggests that first-time homebuyers get pre-approved for a mortgage. This helps people ensure they have time to do their due diligence throughout the process of buying a home. As well, it’s important to create a budget that helps you figure out how much you can expect to pay on a monthly basis for your mortgage. Make sure not to put aside more than 30 per cent of your income. Finally, it’s a good rule of thumb to have 1.5 per cent of your home’s purchase price ready to cover any closings costs.
“Purchasing a home is a major milestone, but it is important to consider how homeownership will impact day-to-day finances and short-term and long-term financial plans,” said Mr. Pirnia in a press release.
There's a lot to consider when you're budgeting for your first home. But with some careful planning, you can make great decisions that make your financial sacrifices worth it.
