New Trend in Home Buying
If you’ve ever wondered how first-time buyers are affording ever-bigger down payments, BMO may have the answer: parental assistance.
BMO’s 2015 Home Buying Report found that 4 in 10 (42%) of first-time buyers are relying on their parents or other family members to pitch in for a down payment. And this reliance is increasing along with home prices. It’s up 12 percentage points from last year and 15 percentage points from 2013.
On average, first-time buyers now plan to spend $312,700 on their first dwelling. That’s 29% less than the national average home price and it reflects about a $1,400 a month payment with 5% down.
The average down payment for a first-time buyer is much higher than 5%, however. It now stands at $59,413, or 19% of the purchase price. That’s up from 16% in both 2014 and 2013.
Meanwhile, for rookie buyers needing family assistance for their purchase, they’re expecting parents or loved ones to pony up an average of 12% of the property value in equity.
But first-timers aren’t the only ones looking to family for help. Repeat buyers wanting to upsize are also increasingly relying on financial assistance from relatives – 42% of them to be exact. They expect their family to contribute a not-so-modest 20% of the property value in equity. Three cheers for generous parents.
As one might expect, these ‘upsizers’ are shopping with substantially higher budgets as well ($473,900), along with higher down payments ($123,214 on average, or 26%).
Other tidbits from BMO’s Home Buyer Report:
- 48% of first-time buyers are willing to enter into a bidding war to secure their dream home (up from 35% in 2014)
- 36% of upsizers are willing to enter a bidding war
- Without help from their family, an eye-opening 40% of first-time buyers and 50% of those wanting to upsize say they wouldn’t be able to afford their home.
We can’t help but wonder how future generations will fare if more parents are unprepared for retirement and unable to donate such large chunks to their children’s home-buying dreams. No one knows when this trend will turn, but if it does, it could have a measurable impact. Indeed, the parental assistance effect may be meaningfully underestimated in Canada’s housing market as it is.
Sidebar: BMO recommends buyers of all types stick to the “one-third” rule if they want to ensure they are living within their means. Simply put, total housing costs, such as mortgage payment, property taxes, heating costs, etc., shouldn’t consume more than one-third of one’s overall household income.Bottom of Form
TORONTO, ONTARIO–(Marketwired – April 23, 2015) – According to the BMO 2015 Home Buying Report released today, Canadian homeowners looking to “upsize” will be turning to their parents for financial help that is higher than the amount first time buyers are hoping to get from their family.
In fact, 42 per cent of current home owners looking to upsize their home are expecting financial help from family. Another 42 per cent of first-time buyers are also expecting their parents or relatives to help pay for their first home, up 12 percentage points from last year.
The report also found:
- Buyers looking to upsize plan to spend $473,900, while first-time buyers’ budgets have decreased slightly to $312,700 – down from $316,100 in 2014
- Upsizers plan to put down 26 per cent, or $123,214, as a down payment, while first-time buyers plan to put down 19 per cent, or $59,413
- First-time buyers who are depending on family help expect family to pay an average of 12 per cent of the average cost of a home towards their purchase; current home owners looking to upsize who are depending on family help expect family to pay an average of 20 per cent of the average cost of the home
- 50 per cent of upsizers and 40 percent first timers who are depending on this help say they would not be able to afford a home without this financial help from family
“Whether buying a first home or moving onto another home, we’re seeing more and more buyers embark on the journey with help from family,” said Martin Nel, Vice President of Personal Banking Products, BMO Bank of Montreal. “It’s important for both buyers and their family to discuss their budget and the expectation for financial help. Creating a detailed savings plan and building an after-purchase budget can help determine what is truly affordable.”
First-Time Buyers Facing Increased Competition as Willingness to Enter Bidding War Rises
Nearly half (48 per cent) of first-time buyers are willing to enter a bidding war – a significant increase from 35 per cent in 2014. Only 36 per cent of upsizers are willing to enter a bidding war.
According to BMO Economics, population growth in the 25 – 34 age group is increasing at a steady clip, creating increased demand – particularly in major urban markets.
“The increase in competition from a growing number of Millennial buyers is helping to push up prices in some major markets, leading some first timers to rely on financial support to help them enter the market,” said Robert Kavcic, Senior Economist, BMO Capital Markets.
|Average House Price by Province * (as of March 2015)|
*Average house price not seasonally adjusted
BMO offers the following advice for Canadians searching for a new home this spring:
Get pre-approved: Get a head start on planning by getting pre-approved for a mortgage before setting out to lock down the perfect home. Once pre-approved, the bank will honour the rate for the duration of the pre-approval period – 90-days at BMO – keeping you protected if interest rates rise.
Live within your means: Stick to the “one third” rule to ensure you’re living within your means. Total housing costs (mortgage payments, property taxes, heating costs, etc.) should not consume more than one third of overall household income.
Think carefully about fixed vs. variable: While variable rate mortgages have been a winning strategy over the long term, fixed rate mortgages (currently near historic lows) come with the peace of mind of being insulated against rate increases.
BMO Offers the BMO Smart Fixed Mortgage, which can help home buyers save thousands in interest payments and become mortgage-free faster. For more information on the BMO Smart Fixed Mortgage or for help and advice on the home buying process, please click here.
The BMO Home Buyers Report was conducted by Pollara. Survey results cited in this report are from online interviews with a random sample of 2,007 Canadians 18 years of age and over, conducted between February 24thand March 5th, 2015. As a guideline, a probability sample of this size would yield results accurate to ± 2.2 per cent, 19 times out of 20. Data has been weighted by region, gender, and age, based on the most recent Census figures, so that it is representative of all adult Canadians.