Making a down payment for a home has turned out to be a tough aspect for most prospective home buyers in Toronto and large parts of the GTA (Greater Toronto Area) as per several reports. This is because of the mortgage stress test that has been introduced last year and this is putting a major load on homebuyers to qualify for mortgages for buying properties of their choice. As a result, they are resorting to several measures in order to buy homes in Toronto.
Several first-time buyers are now finding it easier to purchase their chosen homes in case they already own one home. TREB (Toronto Real Estate Board) has reportedly conducted its own survey of buyers which is done on an annual basis. This has thrown up some really interesting results by all means. One out of every ten dollars deployed for home down payments by first-time home buyers will be coming from equity in their present homes as per the findings of this insightful survey. This is a major trend that could widen in the near future as more and more people find it hard to clear the stringent mortgage stress test.
Are buyers really depending on existing homes?
As per reports, there are multiple tools being tapped by prospective home buyers which are quite similar to existing owners of homes. As per the survey, a whopping 35% will have down payments coming from their own savings outside of RRSPs while savings within the latter will be the second biggest source of down payments to be made by first time home buyers. 17% of down payments will be made courtesy gifts and inheritances given by family members and also friends. There is also a chance of 10% of down payments being tapped from equity that first time home buyers hold already in their present homes. The other 20% comes from diverse other sources.
As per studies, 1 dollar out of every 10 used for down payments will be coming from the home equity possessed by prospective home buyers in their current homes. This may seem surprising since first time buyers do not usually have their own homes to depend upon. In such a scenario, it may be so that it may not be the first home for a prospective buyer or they may be depending on equity in homes owned by family members and friends as per some experts. One can always borrow the down payment funding from family members and close friends and this is often suggested by several brokerage experts as well. The issue is that home equity is borrowed mostly at a higher rate of interest as compared to mortgages. This can add up to a major amount particularly if one chooses the interest-only payment option. Additionally, there will be less equity in a home for a first-time buyer than one usually thinks.
Another possibility could be that these are not first time home buyers and may be concealing the fact due to the anxieties regarding the mortgage stress test. There are several reasons for people taking this route and one is obviously getting the first time home buyer credits and there are many who buy and flip homes in the names of friends and children, claiming these properties to be their first homes. However, many people do get caught doing this and it is strictly avoided. In fact, the CRA (Canada Revenue Agency) has already started investigating tax evasion on real estate and there was recovery of a whopping $210 million just from Ontario in the period between April 2015 and September 2016. These funds were recovered from those who were concealing or lying about things like flipping, HST, capital gains and unlawful rebate declaration including first time home buyer credits.
Whenever there are big incentives for purchasing real estate, most people end up taking risks which will never be logical or worth it in the long run. As per the recent trends, several first time home buyers are turning to equity in homes of their family members and friends to raise the funding for down payments. This may not be a smart move in the long run. A better option is always to save more money for the down payment and wait it out a while before plunging into the home buying process. The Toronto real estate market is relatively stable at the moment and increases in prices, if any, will be moderate as predicted for 2019. In fact, Toronto will also get more supply of condos and other housing units which will lead to prices remaining at balanced levels overall. This gives more incentive to homebuyers to wait and watch before accumulating money for the down payment instead of resorting to these measures as suggested by experts.