Getting into the real estate market these days isn’t as easy as it used to be. The cost of living is rising, wages are stagnant and home prices going up. If you’re finding it tough to get your foot in the door, you’re not alone.
Here are some creative ways to get into the real estate market today in spite of high home prices.
Turning to the Bank of Mom and Dad
If you’re buying in a more pricey real market like Toronto and Vancouver, I feel your pain. Buying a condo, let alone a house, in these cities can be challenging. That’s why a lot of first-time homebuyers are going to the Bank of Mom and Dad. Many parents are willing to lend a helping hand if it means their adult kids will be able to buy in a decent neighbourhood nearby. Where are parents getting the money? Many are borrowing from the equity they’ve built up in their homes with a home equity line of credit (HELOC).
While there’s nothing wrong with asking for help, to improve your chances of making a successful withdrawal from the Bank of Mom and Dad, it helps to go prepared. Save as much toward your down payment on your own as possible. If you’ve made the effort, your parents may be more willing to top up your down payment so you don’t have to pay mortgage insurance premiums.
Your parents can help you with your down payment in a few ways. They can gift you the money outright. Or they can arrange a living inheritance, where you’re gifted inheritance now, while they’re still alive.
Buying with Family and Friends
An emerging trend with young buyers is buying real estate with family and friends. This is most common in expensive real estate markets, where it might take years to save up a down payment.
Buying with family and friends can be a great way to build up equity and get your foot in the door. You don’t even have to live together—some people do it purely as an investment.
When buying a property with someone, treat it like a business. Work with a lawyer to draft a plan for when someone wants to sell. Also consider the pain and strain owning such a large asset can put on your friendship. If your co-buyer loses their job and can’t pay the mortgage, this may end up hurting your credit score.
Saving for a Down Payment
So how much should you save for your down payment? Should you save the minimum down payment (5% for a purchase price under $500,000; when the purchase price is between $500,000 and $1 million, 5% on the first $500,000 and 10% for the portion above), or should you save 20%? If you’re in a small or midsize city like Regina or Winnipeg, where real estate is more affordable, aim for a 20% down payment. But if you’re in a major city where home prices keep rising, you’re typically better off buying when you’ve saved the minimum down payment (aim for a 10% down payment instead of 5%, to save on mortgage insurance). If you’re on the cusp of saving 20%, it’s probably worth waiting until you can save at least 20% to avoid costly mortgage insurance. Just make sure you aren’t priced out of the market while you save.
Brought to you bySean Cooper