That’s the conclusion of a recent study by the Canadian Association of Accredited Mortgage Professionals (CAAMP), which found that since 2010, only 17 per cent of first-time buyers had help from their parents for the down payment.
Report author Will Dunning says some people may find the results surprising. Since 1980, gifts and loans from family members have accounted for about 13 per cent of down payment funds, he says. From 2010 to 2014 “there was an increase in gifts from family members (to 11 per cent versus the overall average of six per cent) and in the combined total for gifts plus loans from family (to 17 per cent from 13 per cent). But even at this recently elevated share, we cannot say that this source of funds has become an important driver of home buying,” Dunning says.
On average, first-time buyers make down payments of 21 per cent of the price of the home.
Personal savings is the largest source of funds for first-time buyers, averaging 45 per cent since 1980 and 40 per cent for purchasers during the last four years. Loans from financial institutions were used by 28 per cent of buyers.
In 1992, the federal government introduced the Home Buyers Plan (HBP), which allows first-time buyers with a Registered Retirement Savings Plan to withdraw up to $25,000 tax-free to help with a down payment.
“Combining personal savings plus RRSP withdrawals, the combined share has been relatively consistent at just over 50 per cent,” says Dunning. “The implication is that the role of personal savings has not really changed, but the advent of the HBP provided an opportunity to save some income tax.”
However, use of the HBP has been dropping — from a 16 per cent share in 2000-2004 to nine per cent during the last four years.
The Canadian Real Estate Board (CREA), which was largely responsible for getting the HBP introduced, is lobbying to get the withdrawal limit indexed to the Consumer Price Index.
“The affordability of homeownership is a growing concern for first-time buyers; meanwhile the HBP is losing its purchasing power to inflation,” says CREA in a consultation paper for the 2015 Federal Budget. “To date, more than 2.7 million Canadians have used the HBP to help make homeownership more affordable. However, due to inflationary trends, the HBP has already lost over $1,600 in purchasing power since it was last adjusted in 2009. If left unadjusted for inflation, a homebuyer in 2020 will receive over $5,000 less value from the plan compared to a homebuyer in 2009.”
CREA says the plan allows first-time buyers to reduce or avoid mortgage insurance fees and allows them to build equity sooner, saving money on mortgage interest.
CREA wants the government to tie the HBP to the CPI and adjust it in $2,500 increments.
A poll commissioned by the association found that 79 per cent of Canadians support adjusting the maximum HBP withdrawal.
Some observers have worried that the steady housing market of the last decade may result in more defaults when mortgage interest rates eventually rise.
CAAMP’s study says that for mortgage holders who purchased during 2010 or later, the average mortgage interest rate is 3.5 per cent.
When it comes time to renew their mortgages, “it appears highly likely that rates of 3.5 per cent or lower will be attainable,” says the report. “Therefore, for most of these borrowers, interest rates should be unchanged or fall when their mortgages are renewed.”
Dunning says that “this and earlier research by CAAMP have shown that mortgage borrowers have anticipated and prepared for future rate increases.”
The study found that on average, home equity in Canada is equivalent to 74 per cent of the value of the homes. Homeowners with mortgages have an average of 49 per cent equity, while for owners who have both mortgages and a home equity line of credit loan, the equity ratio is 64 per cent. More than 85 per cent of homeowners in Canada have 25 per cent or more equity.
Seventy per cent of those surveyed see their homes as a place to live, while 30 per cent see it as an investment. The survey says 91 per cent of homeowners are happy with their decision to buy and more than seven in 10 say real estate is a good long-term investment.
CAAMP says that by the end of 2015, total outstanding residential mortgage credit in Canada will reach $1.34 trillion.
Written by Jim Adair