Getting a Foot in the Door: Overcoming the challenges faced by first-time homebuyers

By Samantha Gale, LLB – CEO of the Canadian Mortgage Brokers Association – British Columbia

Due to a perfect storm of significant housing price appreciation, tight rental conditions, stagnant wage growth and stricter mortgage regulations, prospective first-time home buyers are facing multiple challenges in their attempts to save a down payment and qualify for a mortgage.

In fact, according the 2016 census, nearly 40% of those aged 20-35 in the Vancouver area still live with their parents. While the reasons for this large cohort are myriad, the single greatest challenge faced by this group is overcoming the incredibly high barriers to home ownership.

“We are seeing people who are older and have opted to rent longer,” says Troy Resvick, President of the Canadian Mortgage Brokers Association – British Columbia (CMBA – BC) “We’re also seeing the other side of that, where family is assisting them to get into the market.”

“With most detached houses in Langley priced above $750,000, finding a home that first-time buyers can afford is a daunting task,” says Resvick. “Either adjust your expectations significantly, or let’s talk to the Bank of Mom and Dad.”

Resvick is referring to the increasing trend of parents digging into their savings or securing reverse mortgages in order to gift a down payment to their children.

‘Stressful’ tests

Amid the backdrop of a hot real estate market in the Lower Mainland, the Office of the Superintendent of Financial Institutions (OSFI) applied new regulations requiring both insured and uninsured borrowers to be “stress tested” before a mortgage can be approved.

“Some clients are finding they’ve been re-priced,” said Resvick. “They can get less money now, so that means shopping for a less expensive home. It’s significantly reduced British Columbians’ homebuying power.”

For others, it means they’re out of the market entirely, unless a relative is able to chip in with a monetary gift. Some buyers are even moonlighting at part-time jobs to save for a down payment, while others pool funds with family members or even friends to buy a home.

“It’s getting harder and harder to get into the market these days,” confirmed Reza Sabour, a CMBA – BC Director. “A combination of factors is keeping buyers out of the market.”

According to Sabour, stress tests take can 20 per cent off a buyer’s purchasing power. That means people are forced to “drive to qualify,” meaning they are looking further afield for housing, even if that means a much longer commute to work.

Credit Clean-up

So, what can first-time homebuyers do to increase their chances of qualifying for a mortgage?

According to industry experts, it starts with getting your financial house in order – and that means cleaning up your credit.

“Lenders look at credit, and paying your bills on time,” said Suzanne Fleur de Lys-Aujla, a Director of CMBA – BC and Co-founder of Women in the Mortgage Industry.

“If you have great credit, then when you go to the lender it helps support the rest of your file. Managing your debt, for example not having a car payment, helps you get more mortgage.”

“The optics of a file have never been more important than they are now, said Rob Regan-Pollock, Senior Broker at Invis in Vancouver.  “A good broker would be able to convey to those buyers what they should do to improve their credit rating.  If there is high utilization on one credit card, figure out a way to reduce it to 50 per cent of your limit, for example. Ideally, we don’t want to see any credit pressure for first-time buyers.”

Lenders want to see stability, especially when it comes to employment history, and are increasingly assessing applicants based on financial risk models.

“Credit has never been on the forefront of the application as it is now,” said Sabour. “Credit history determines the rate you get, the product, the amortization, etc. So clean it up, and don’t go under any large financial obligation or consumer debt before you get your mortgage.”

Options and Assistance

In the past, a five-year fixed mortgage was the “go-to” for first-time buyers, but Sabour noted that new buyers are now leaning toward shorter terms with longer amortization – up to 25 years with less than 20 per cent down, and up to 30 years with a 20 per cent down payment or greater. Despite rising interest rates, variable rate mortgages are increasingly popular, as they often come with a lower monthly payment than fixed rate mortgages.