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July 15, 2019 Kristen Godel

Young Buyers Swapping Retirement Savings for Down Payments

Isn’t this a scary thought? Younger buyers are thinking shorter term, rather than planning for their retirement. This might mean that we’re a generation doomed to work longer and live pay cheque to pay cheque…. but why the drastic change? It’s not that new buyers don’t care about retirement, but rather, postponing retirement is going to get them a down payment sooner so they can purchase a home to one day retire in! This sounds like a horrible catch 22, but this change in financial habit can be attributed to two things:
1. More stringent qualification guidelines (stress test, B20 regulations)
2. Higher home prices (Appreciation and high demand)

To be clear, it’s not one or the other, it’s both. More stringent guidelines cause the need for higher percentage down payments, and the need for a higher percentage down payments automatically equates to more dollars.
Ex. A young couple, first time buyers, want to purchase a semi-detached home in Mississauga valued at $675,000. Due to the stress test, their debt servicing ratios are high and to best counter this, they are required to put a 20% down payment for the ratios to align. The minimum down payment would have been ideal ($26,750) but now they must provide $135,000 to achieve the same purchase.
Can you see, based on this realistic example, the major problem young buyers are facing? You might also be asking, where the heck at young buyers finding $135,000 for a down payment? Well to be frank, many aren’t. However, for those who are, here is how they’re making it happen (based on respondents of a large survey):

  • RRSP withdrawals – Under the first-time home buyer plan, buyers can withdraw up to $25,000 per applicant from their RRSP’s tax free and repayable over 15 years (31%)
  • Gifted funds – Financial gifting from immediate family (52%)
  • Loans – Personal loans from friends or family (12%)
  • Investments – Sale or cashing out of investments (11%)
  • Borrowing – Unsecured debts such as lines of credit/credit cards (8%)
  • Sale of home – Proceeds from the sale of an existing home (25%)

There a silver lining. Despite the personal financial sacrifices made by young home buyers to come up with a down payment and to bring fruition to their goals, many still have confidence in the real estate market. There is still belief that the real estate investment will outperform other investments or will offset the liability taken on to supply the down payment in the first place.
For more information, don’t hesitate to reach out to us today! (905) 455-5005.