How can first time buyers afford to buy a home today?
With the recent rise of home prices first-time buyers need more down payment than ever before. They have also had to grapple with:
The increased costs of mortgage insurance as provided by CMHC plus other default insurers and
he stress test imposed on insured mortgages by the government in fall of 2016.
Findings to Answer the Question
A most convincing answer to the question comes from a recent survey by the Mortgage Professionals of Canada authored by their economist William Dunning.
Before 1990 the average downpayment for first time buyers was 21% and 66% had down payments of less than 20%.
Between 1990 and 2013, that average down payment hovered between 21% and 22%. The percentage of first time buyers with less than 20% down ranged from 56% to 62%.
In the most recent buying cycle, between 2014 through 2017, the average down payment increased to 26%, and the percentage of first time buyers with less than 20% dropped to 42%.
Under the National Housing Act, any purchase with a down payment of less than 20% requires mortgage insurance which varies in cost depending on the percentage down. A down payment of 5% to 10% attracts the highest premium of 4% which is applied to the mortgage. On a $300,000 mortgage $12,000 would be added and the mortgage payment is based on $312,000 total.
The cost of mortgage insurance has increased as follows for 5% to 10% down: until May 31, 2015: 3.15%, as of June 1, 2015: 3.60%, and as of March 17, 2017: 4.00%.
Benefits of Increasing Down Payment
Finding sources to increase down payments can avoid the cost of mortgage insurance. In turn, it decreases the loan amount giving the buyer a better chance of passing the stress test which, as of January 1, 2018, is being applied to most mortgage amounts. Currently it has been reported that some 20% of mortgage applicants are unable to obtain the mortgage applied for due to failing the stress test.
More than One Source for Down Payment
In the latest buying cycle (2014 -2017), most first time buyers used an average of 2.2 sources of funds for their down payment. Only about 47% used one source.
Where Down Payments Came From
The following gives how much of the down payments came from various sources. Though buyers rely on any number of sources, parents have played a greater role in assisting with down payments through loans and gifts.
The most important source continues to be personal savings at 52%. Loans from financial institutions are next highest at 21%; family gifts at 10%; family loans at 5%; and 9% from RRSP/Home Buyers Plans.
Thanks to William Dunning for this report.