The single biggest hurdle that keeps many renters from becoming homeowners is the down payment. With the average price of a detached home over $1 million in Toronto and Vancouver, it’s more important than ever to set yourself realistic home-buying expectations to avoid disappointment. You may not be able to afford a similar home as the one that you grew up in, but that doesn’t mean the dream of homeownership is out of reach. Here are four creative ways to get into the housing market.
Turning to the Bank of Mom and Dad
If you’re buying in a high-priced market like Toronto and Vancouver, I feel your pain. Buying a condo, let alone a house, in these cities is tough. That’s why many first-time homebuyers are turning to the Bank
of Mom and Dad. 42% of first-timer homebuyers get help with their down payment from family, found Pollara Strategic Insights. Many parents are willing to help out if it means their adult kids will be able to buy in a decent neighbourhood close by. Where are parents getting the money from? Many are tapping into the equity they’ve built up in their homes with a home equity line of credit (HELOC).
While there’s no shame in asking for help, to better your chances of making a successful withdrawal from the Bank of Mom and Dad, go prepared. Save as much toward your down payment on your own as you can. If you’ve made the effort, your parents may be more willing to top up your down payment to avoid your having to pay a mortgage insurance premium.
Your parents can help you with your down payment in several ways. They can gift you the money outright, with no strings attached. Or they can arrange a living inheritance, whereby they gift you your inheritance now, while they’re still alive. This is an emerging trend in Canada—61% of baby boomers plan to pass on money to their children during their lifetime, found a survey by RBC.
Buying with Family and Friends
An emerging trend among young buyers is purchasing real estate with family and friends: one in four millennials would consider buying a home with a friend, and 24% would consider buying with a family member, found a poll by RBC. This is most common in high-priced markets, where it might take years to save up a down payment.
Buying with family and friends can be a great way to build 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 in the event that one person wants to sell. Also consider the pain and strain owning such a large asset can put on your relationship. If your co-buyer loses their job and can’t pay the mortgage, this may end up hurting your credit score.
Buying Outside the Big City
Much of my upcoming book’s focus is on buying a home in a big city. That’s because homes are less affordable there. Big cities tend to have better job opportunities, but those come at a cost (higher home prices). If you live in a small city or town, where homes are more affordable, and you have a decent job, take advantage of this. If you’re really focused, maybe you can pay off your mortgage in three years, like I did.
I recently read an interesting story about a young man who moved from Windsor to Toronto in pursuit of better career opportunities. After struggling with the high cost of living in Toronto for six months, he decided to move back home to Windsor. Not only did he land a better job, he soon became a first-time homebuyer and landlord. With a down payment of only $6,250, he was able to purchase a home for only $125,000. (If you’re a millennial looking at getting into the real estate market, I highly recommend checking out Lowest Rate’s Young Money series.)
Supercharging Your Down Payment
It’s tough to save a down payment when you’re paying big-city rent. By living at home with your parents rent-free or with below-market rent, you can maximize your savings. Your parents may not be too keen on this, so remind them it’s only temporary. In lieu of paying rent, offer to help out around the house.
If you’re not too keen on the idea of moving home, another option is to downsize to a bachelor pad. If you have a one- or two-bedroom apartment, downsize to a bachelor apartment. You might also consider renting in a less pricey part of town. If you aren’t ready to forgo your upscale downtown condo, share the rent with a roommate. To save even more, consider renting a one-bedroom condo with a den that can be used as a bedroom.
Sean Cooper is the author of the upcoming book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians, available for pre-order now on Amazon and in bookstores March 1, 2017.