BANK OF MOM AND DAD LIVES ON
While the so-called bank of mom and dad has long been a welltapped resource for young homebuyers, recent qualifying barriers may be making their role even more key. Some multi-family developers in Calgary, who typically sell to a large share of first-time purchasers, are seeing more parents lend a hand as their adult child steps into home ownership.
“Many first-time buyers see an opportunity and strength in our market, and they want to take advantage of becoming a homeowner, especially when they know the alternative is continuing to live at their parents’ home, or renting,” says Alina Wegener, area manager for Sandgate in Calgary’s lake community of Mahogany. “Rather than spend money on rent, first-time buyers are investing in their own future, and that’s something that parents appreciate from their own experiences with home ownership. In the past few months, we’ve seen a new trend with parents buying a property for their kids or helping their kids buy their first home.”
A national survey by HSBC Bank of Canada released in early 2017 says 82 per cent of millennials expect to buy their first home in the next five years. Thirty-seven per cent of millennials who have purchased a home, turned to their parents for a “source of funding,” says the survey. Help from parents can come in a few forms. Common options include the full or partial gift of the minimum down payment, and coming on as a cosigner.
“We have continued to see parents involvement in new home purchases, particularly with firsttime buyers,” says Chelsey Marshall, sales and marketing manager for Bucci Developments. “In some cases the down payments are being gifted, in others parents have cosigned on mortgage pre-approvals. Historically, this has been common with first-time buyers purchasing in our developments. Possession is usually a couple of years away, which means their child has a couple of years to prepare for home ownership before actually taking possession.”
This may include saving money, buying furniture, and getting comfortable with their budget. As a co-signer, the income and credit history of both names are factored in on the mortgage application, helping clear some of the recent hurdles now faced by borrowers.
Many first-time buyers see an opportunity and strength in our market, and they want to take advantage of becoming a homeowner ...
“With the new mortgage rules, or stress test coming into effect, we have seen more people come in with a co-signer, and it’s often their parents that agree to go on the contract,” Wegener says.
Since October 2017, all buyers seeking high-ratio insured mortgages have needed to qualify for both their contract rate and the conventional five-year fixed posted rate through the Bank of Canada. This applies to buyers with a down payment of less than 20 per cent. The Bank of Canada figure, generally higher than most contract rates, is the most common number advertised by the six largest banks in Canada. A stress test for uninsured mortgages, which impacts buyers with a down payment of 20 per cent or more, will be rolled out Jan. 1, 2018.
“Realistically, the (first-time buyer) can afford a place on their own, but because banks are qualifying them at a higher rate, they may have no choice but to have a co-signer,” says Wegener. “At first, the stress test seemed to worry people, but when we educate them around why and how it benefits them, they are more at ease with it. The parent’s involvement stops once they sign or help with their deposit. Once their (adult child) takes possession, it’s their responsibility to pay the mortgage and other bills. We see the parents set that expectation from the beginning.”
The increased role of parents in the home buying process has been seen at the Walden Place sales centre, too.
“We have been seeing parents for a while but it’s definitely more pronounced,” says area sales manager Brad Logel, of activity since the mortgage rule change last year. “It’s more difficult to qualify. Parents are willing, ready, and more active. They want to give their kids an advantage. And if they have the ability to do so, then fantastic. It’s something that I think every parent needs to think about: Are my kids going to be able to buy a home? It’s looking forward, not unlike it would be with secondary education.”
Parents helping their adult child through their first home purchase is useful on multiple levels, including asking important questions.
“They’ve done it,” says Logel, who singles out topics such as heating, sound attenuation, warranties and rates. “They ’re very thorough. They may come up with something before we have an opportunity to talk about it. They ask a lot more questions regarding insurance, the plans for the future amenities and services in the community, such as schools, transit, hospitals.”
“Giving your kids a head start on owning their home teaches them the importance of saving toward their future,” says Wegener. “It truly is an investment in the future. It also shows their kids the importance of making smart home-buying choices — (that) they should really be looking for great quality, smart home designs, on-site amenities and a fantastic location, because these are things that add value long-term.”