Everyone knows the easiest way for a first-time buyer to buy a home, is to already own a home. The Toronto Real Estate Board (TREB) published results from its annual buyer survey. The survey asks recent and intending buyers about their experience, and gives the industry insights into their behavior. Most of it was not all that surprising, except for the sources of down payment. Turns out, 1 in 10 dollars used for down payments from first-time buyers will come from equity in their current home. Uh… what?
First-Time Buyer Down Payments
First-time buyers are using a variety of down payment tools, all similar to existing homeowner. Survey respondents said 35% of down payment funds will come from savings outside of their RRSP. The second largest single source will be savings from within their RRSPs. That was followed by 17% of funds coming from gifts from generous family and friends. The last identifiable source is 10% from equity in their “current home.” The remaining 20% is a mystery meat assortment, categorized as “other.”
Source: TREB Annual Buyer Survey, Ipsos.
First-Time Buyers Have Home Equity?
Let’s ignore the mystery meat, gloss over generous friends, and jump into “equity from current home.” One in ten dollars used for a first-time buyer’s down payments is from equity in their current home? That’s weird because first-time buyers don’t have their own home to draw equity from. This implies they’ll be using equity from family or friends, or it’s not their first home.
Borrowing a down payment from friends and family isn’t against the rules, it’s just not very smart. Heck, some mortgage brokers even suggest it, while casually mentioning interest only sources of loans. The first problem is home equity is usually borrowed at a higher interest rate than mortgages. That can add up, especially if you’re on an interest only payment plan. More important, there’s less equity in a first-time buyer’s house than previously thought. It doesn’t exactly reflect the prudential lending environment narrative told.
Not Actually First-Time Buyers?
The second most likely scenario is lying about being a first-time buyer. There’s a few reasons people do this, but most likely is to get first-time homeowner credit. Buying and flipping in a child or friend’s name, and claiming it’s their primary home is common. If they aren’t caught, they save a few bucks. Only problem is a whole lot of people actually do get caught.
The Canada Revenue Agency (CRA) has begun cracking down on real estate tax evasion. From April 2015 to September 2016, the agency recovered over $210 million in Ontario alone. Those funds came from people lying about sources, flipping, capital gains, HST, and improper declaration of rebates… like the first-time buyer credit. It’s common to lie about real estate to save some taxes, but it’s expensive and not very smart.
When the incentive to buy real estate is high, people take risks that aren’t necessarily logical. Sometimes those risks pay off, and sometimes they don’t. Either way, a very small number of people are making risky moves in this market. The question risk experts need to ask is how much longer can people continue to take these risks.
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