Mortgage Options for First-Time Home Buyers

Hi everyone, I’m James Garbutt. And I’m Denny Dumas. And this is the Garbutt Dumas Real Estate Podcast.

Denny: Back on the GD podcast, special guest mortgage broker extraordinaire – Alex McFadyen.

Alex: Thank you. I put my glasses on so I look smarter today. 

Denny: All your financing needs, he’ll help you out.  To be honest this guy knows a ton about financing and investing and being a first time buyer.

Alex: I do.

Denny: And helping first time buyers achieve, it sounds a bit corny to say, the dream of homeownership but it actually is and owning in Vancouver is very challenging. Vancouver estate  continues to be more and more and more and more expensive. And if you are a first time homebuyer you’re probably currently renting and rents have skyrocketed. But what a normal one bedroom rent in new West is $2,300, $2,400, $2,500 a month. 

So we’re gonna talk about like what does that look like in a mortgage payment? What can you buy? And how do you qualify? And where are people getting help for down payments? And what incentives are available currently from governments to help you make this dream come true.

Alex: Here we go. 

Denny: First time buyers let’s start with: where do you get information?

Alex: Okay, and don’t mind me picking up my phone here. I’m just preparing to calculate some mortgage payments here for you, so because as much as I wish I had everything in my brain, there’s only a limit. 

Denny: So let me preface this information while you are doing some calculations with real estate. And the idea of buying real estate if you have not bought real estate before, is super intimidating. It is expensive. There is a crazy amount of paperwork, especially if you’re buying a strata. If you get an accepted offer on a strata and you ask for the strata documents, you’re gonna get a package that has like 300 pages in it. It’s very overwhelming if you’ve never seen that as a, you know, 25 year old or whatever. Trying to understand all of this information that you’ve been getting thrown out . But, so back to my question of where do you go for information Alex?

Alex: Listen, I, we know where people typically go for this information and that’s the wrong source.

Denny:  Family and friends.

Alex: I mean that or Reddit. I don’t think there’s a bad thing in asking questions. You know, when I was younger and I was looking to buy my first home I talked to my parents too, but then I quickly realized they didn’t know what they were talking about. And that I didn’t buy a home right away. So I blame it all on them that in a home sooner. No, I don’t but I would have bought a home sooner if I had understood it. 

So I’ll take that as my responsibility and if somebody’s listening to this podcast or watching a reel or anything of that nature, if there’s one thing that I would take away to talk to an independent professional, someone who actually does business. Who’s doing a consistent amount of business because there’s a difference between somebody who’s, who’s got their license, and they sell a few homes a year that’s probably hungry for commission, and someone who’s helping a lot of families and they run a proper business and their responsibility is to help advise you. They’re going to give you probably more direct answers and there’ll be a little bit less bias. 

So where do you get information? I mean, the good news is that you’re putting out content like this, which is meant to educate people like we’re not getting paid to be sitting here at 7:30 on a whatever night of the week this is. 

Denny: It’s Tuesday.

Alex: Tuesday night of the week. We’re here because we believe that the best way to reach people is by educating, supporting and helping because a lot of this information is widely available. But I think the biggest problem is there’s too much information. Where do you get started? 

Well, the first thing people do these days well it used to be Google now it’s probably chat GPT. But it’s so complex. There’s so much information to weed through. And when you search for information, the interesting thing about searching on Google or chat GBT is the information is rarely very personal. It’s rarely very specific. It’s just a bunch of generalities. And you can go down the rabbit hole of all I need to know this and I need to know that and I need to know this and to your point becomes scary, overwhelming, concerning, it’s a lot of money and I don’t want to do it because it costs a lot. 

But what we hope people do is they get excited, nervous-excited is okay. Is it good stress, right? We get nervous-excited. We have a basic plan of action, what we need to do, and then they can do that today or tomorrow. And they put themselves in a position where they look at this as an investment and not a cost and perhaps investment in the mindset of whether it’s my home that’s an investment for me and I’m putting my money in a good place instead of rent .100% interest on rent 5% on a mortgage rate, right? But investment in perspective, investing into something personal for themselves that they know that can grow over time. 

So it’s a changing mindset. It’s a change of place. It’s talking to the right people. It’s asking good questions and working with people who ask the right questions of you, determine why you’re doing it.

Denny: As you are explaining all these things, I’m just thinking of so many things, but the big thing that comes out of it: 1)  is like it’s a really prideful moment to purchase your first home 2)  is it’s an asset that you now own that you can use down the road to leverage out of or to refinance, to purchase a, you know, to upsize to whatever it may be. But the idea of paying rent to me has always been uncomfortable, because it’s just money down the drain that isn’t doing anything for me forever.

Alex: The biggest thing that I wish someone would take away if they’re thinking about getting into real estate in their younger right now whether you’re 18 or 25 is this thing, this sort of thing, it does take time. Okay, so perhaps some people are fortunate that they can just get pre- qualified to make enough income, they have the money available. It’s not a common occurrence. Most people they have to set a goal or talk to someone and then come back in 3-6-12 months to make it happen. 

Well, we talked about this in other parts of our life, whether it’s getting in shape or something else, but we need to delay the gratification of buying a home and understand that it is not guaranteed. This is something we need to work towards. You need to work towards. But there’s so many resources to help you make it happen. And there’s so much value in doing so. And it’s not a perfect situation. There’s nothing perfect about buying your first home, not the process. Nothing, right? Like there’s a lot of unique things that can happen or change or market conditions, or people that can get involved. 

But at the end of the day, if we remove that mindset of I can just turn a little knob and click a button and all of a sudden I’m buying a home and I realize that there’s something at work for, work towards. Not only is it more meaningful, but we can be okay with taking six or 12 months to get to that place.

Denny: Was the first property ever bought your dream home?

Alex: If you consider a 1992 condo in a self managed strata building in Langley City in an area where my car got broken into six times in the first six months, and I did a complete gut job with a smoker next door a dream home then yes.

Denny: I think the point I’m trying to make is, is starting small is okay. My first place was a one bedroom condo in New West that was 620 square feet that cost $272,000. And 5 years later, I had $120,000 worth of equity and I could upsize to a two bedroom. 

Alex: There we go! And then, it’s a lot. 

Denny:  It keeps progressing right?  And over time you save more money and your property value goes up and you are paying down your principal and then you have options. Then you have this asset that has equity that you can talk to someone like Alex to find out all your options of refinancing versus selling and upsizing. And then there’s options and then that’s where a lot of people build most of their net wealth is through real estate. 

But getting back to first time buying and starting. You mentioned delayed gratification. This is a process. Maybe it starts with a conversation to kind of build a game plan but it’s a 24 month out kind of thing. What incentives are available to young people who have never owned a home before to help them?

Alex: Yeah, well, the neat thing is there are some new incentives now that have come out. So they’re, they are  provincial incentives. So most of our listeners are probably BC so we can talk about BCs provincial incentives. So we have the property transfer tax exemption. You know, in Vancouver let’s be honest, a lot of properties are worth more than $500,000. So that may or may not be useful for you and I wouldn’t wait on the government to change this. But if you buy a property for $500,000 or less, you can be exempt from paying the transfer tax.

Denny:  If..

Alex: if you’re owner-occupied,sorry. 

Denny: If it’s your property. 

Alex: Yeah, absolutely. It’s got to be your property. Thank you for throwing that in there. Very good. And okay, so I’m making an assumption that people that are listening are probably buying this for themselves. So we could talk about investment too. 

If it’s a brand new build, anyone gets a transfer tax exemption up to $750, same reason. Now there’s a little minor exemption for the $25,000 above that, so $500 to $525. There’s a sliding scale at $525 you pay 100% At $500, you pay 0%. So a little bit there to help you out. Same thing on the new development side. So that’s the first exemption. You know, for some people it works out in their favor for others who don’t, I recommend people they don’t shop just to save a grand but if you can, awesome. 

Second one of course, is you know, is the home buyers plan. Now the home buyers plan the crazy thing about it, it’s a federal government program. It’s changed so much in the last few years. They’ve added they’ve removed there’s been some good and some bad most recently good. FHSA. The brief overview is it’s like a tax free savings account that you can use you can invest,  you can put money in you don’t have to pay tax on it, which is fantastic. You can also use that money as a credit to your income taxes when you invest so that money the interest that you’re using is a deduction on your expenses that gets complicated. So basically talk to accountants what I’m trying to say.

But you can put $8,000 a year into it up to a maximum of $40,000 and both you and your partner can both use that. Now the best part riffing off with that is that you can also use the RRSP program which is the ability to borrow back $35,000 per person again, from your RRSP for the down payment tax free again, you don’t have to pay for that as long as you repay that in 15 years. 

Now, to distinguish the two the FHSA program can be used in concert with the RRSP program, the FHSA, you don’t need to repay that’s kind of neat. You don’t have to repay whereas the RRSP when you do but if you use those together, you got virtually no I mean, I guess if you buy in like five years, you’ve got $75,000 of additional money that you can use for down payment that’s essentially been not not been taxed, which is fantastic. Because at the end of the day, sometimes it’s not about making more money. It’s about paying less tax, which is key so what did I say those two there’s also the I don’t even know they call this one of the more what is it the home buyers down payment program? You remember the name of that one? I’m blanking on it.

Denny: Is that the one that the government will match. Five Percent or something? 

Alex: Yeah. Yeah, it’s another one. So listen, I’ve literally ever only seen two people qualify for this program. Yeah, and so one of the challenges and so please don’t ask me to quote all the details of it because I don’t remember them all on top of my head. But I can tell you a few things essentially, why got people excited in the first place is because they thought the government was increasing their downpayment, to help them qualify for a larger price property. 

But what in fact it does is it reduces your loan by the amount of your down payment, so we’ll use a purchase price of $400 grand, I guess you’d goto Chilliwack but we use a $400,000 purchase price. If you were to buy a home for $400 grand and put 5% down is $20,000. If you qualify for this particular program, the government would lend you $20,000 interest free, okay. In exchange for 5% equity in your property. You do have the ability to repay that loan. So if you repay that loan you paid off the government they no longer own a piece of the equity in your home.

If you’re buying a new development property then you can do up to 10% Okay, so you can take 10% Maximum up to a maximum of 19.9% down payment because it has to be an insured mortgage, which is less than 20% down. So, they’ll match it, but again what they’re doing is they’re not increasing your down payment. They’re reducing your loan amounts, so your purchase price remains the same. 

So a lot of people they thought the program was to increase the purchase price. British Columbia had a program back in 2016-17, which actually I thought was a great program. I use it a ton for people. And it was they would match your down payment so you had to have 2.5% down payment. And they would match you to get to 5% to get the minimum down payment requirements to get to your total amount. That program in my opinion was a huge success. I can, I can tell you for a fact I helped probably 30 to 40 people at the time, get into homes that never would have gotten to homes when they didn’t have enough money for a down payment but they qualified because they had good income and credit. Perhaps he didn’t have enough time to save up the money. I would love to see a program like that come back into existence for people or the ability to you know, increase the purchase price or something like that. I think it would be useful if they tweaked the current program.

Denny: What was the repayment of that program? So let’s say I put $20,000 down from my first place, the government matches it, gives me another $20. How do I pay that back?

Alex: You can pay it back when you refinance your loan so you can pay it into your existing loan if you have more equity. So if you had equity in your property, you could repay it at the time that you’ve exited the loan. Okay, or if you sold your property you can just repay the whole amount as well.

Denny: But it’s interest free for…

Alex: So the, hold on, let’s talk about the government program is interest free. I do,n’t remember what the other one was off the top my head but the government program right now the federal one, it is interest free, so 0% interest on that. So that is nice on a 5% interest rate. If you qualify for this program. There’s some value in not paying interest on $20,000 bucks, for sure. So again, one of the challenges and they did kind of rejigged this and Vancouver was that, you know if you had more than I think it was if you had more than $120,000 income you can qualify for the program. So obviously, you’re trying to buy a house in Vancouver or a condo in Vancouver that’s gonna make it pretty difficult because most people that buy a condo here, you know, as a couple they have more income than that, right? 

The second thing is they had a limitation on the maximum purchase price at 4 times your income. Right? 

Denny: Right. 

Alex: So those were the two challenges they’ve rejigged it a little bit and opened it up a little bit more but with the house prices obviously increasing, it appears that it doesn’t really work in a lot of major cities still,  more of the suburbs and so forth. So it might work for somebody who’s listening to this. So it’s good to learn about and I would say definitely go through the rules and regulations on the government website. Of course, we would double check and  go through that with a client if we’re having this conversation. But the short version is that this program hasn’t been a major success because ultimately there hasn’t been a lot of use for it  in most urban areas. 

In rural suburban areas. There have been more uses. So again, further you go east if you’re in the Fraser Valley, or if you go to the Okanagan, you see more of these programs because the cost of borrowers sorry not the cost of borrowing, the cost of buying real estate has been lower. entry level price points, maybe around $300,000 or $400,000 instead of $600-$800 thousand dollars.

Denny: We’ve referenced it a couple of times, but I think it’s important to clarify. There’s a common misconception with consumers that you must have 20% down to buy a property. 

Alex: That’s wrong.

Denny: This is false. The minimum downpayment for a owner occupied home is…

Alex: 5% of the first $500,000 and 10% of anything above that. So if you’re purchasing a property that’s $500,000 that’s $25 grand if it’s $800,000. We’ll go ahead and take 5% which is $25 grand $300,000 More it’s $30,000. So total down payment of $55 grand.

Denny: 10% up to a million, about a million…

Alex:  $1,999,999.99. You cannot be a penny over that, you can’t be, no I’m not joking.

Denny:  I know!

Alex:  If a contract comes in at a million dollars you need 20% down so make that penny count.

Denny: I think this is a really important thing that we discuss with first time homebuyers because they feel like they’re struggling to get to this 20% down number. And they don’t understand that they don’t have to.

Alex: So I want to talk about that because most people that I talked to, as you mentioned that are first time buyers still believe that it’s maybe they don’t believe that you have to put down 20% But they believe it’s the right thing to do. It’s their responsibility to make sure they get 20% down otherwise they’re throwing away their money. And I mean, obviously there’s a lot of reasons they think that, because they’re paying for insurance, because their parents told them it’s a waste of money. One thing or another they heard rumors again that, probably on Reddit.

But the reality is, is if you get into the market with 5% down payment on $25,000 on $500,000 and you hold that property for five years, there’s a much greater probability that that property value goes up by even two and a half, 3% appreciation annually, netting you $50, $75,  $100,000 then that $20,000 of insurance cost negatively impacting you, yes, you have a sunken cost in in the insurance expense. Basically that’s something that you’re never gonna get back. 

But the reality is you’re going to build $75,00, $100,000, $150,000 in equity. Case in point, five years ago, 2018 If you bought a condo in Langley, what was that two bedroom condo worth? Roughly?

Denny: 425k.

Alex: Ok, probably even less.

Denny: Maybe less.

Alex: Let’s say $420K, Let’s say for $425k for a nice one.What can be worth today? 

Denny: $700K.

Alex: Easy. Willowby, Langley $700-$750K. somewhere in that ballpark for a nice two bedroom condo. That’s five years. It’s probably I don’t even know if that’s an extreme example, is it real example. So that’s $250,000 of equity. Someone would have bought that $425,000 somewhere that ball park, whatever. They put basically less than $25,000 down payment to buy that property right. And now today they’ve got $300,000 of equity. 

Denny: The thing about the insurance premium as well is let’s say $20,000 Because that’s the number you threw out there. It varies based on how much you put down. So if you put 5% down your insurance premium is going to be more than if you put 18% down.

Alex:  Yes. 

Denny: Let’s say $20,000 What is the normal rent for a one bedroom right now? $2,500 a month. In  Port Moody, in new West, in Burnaby. It probably is more like $2,800 a month.

Alex:  Yep. 

Denny: That $20,000 goes away in rent. In 8 months? 9 Months? 

Alex: Yeah, it’s gone. 

Denny: See you later. 

Alex: Yep. 

Denny: The other thing to note is you’re going to pay less interest because rates are lower on an insured mortgage than a conventional mortgage.

Alex: True.

Denny:   A lot of consumers don’t understand that. What is the difference? Roughly give me a ballpark. It doesn’t need to be exact but between an insured mortgage versus, insured mortgage means less than 20% down. Conventional mortgage means 20% or more down, just to clarify.

Alex: Spreads change over time. The spread is the difference between two rates. Okay, they do change over time, but today, you’re for let’s say five year fixed mortgage. Not gonna suggest I suggest this for everybody but your floor is probably like five points, or 4.34 right. And most of the charter banks right now are advertising rates in the high fours like 4.945%. So that’s like a 65 point spread right now in interest rates.

Now sometimes it’s greater than that. Sometimes it’s not. It depends on where pricing is at any given time. But let’s just say your average spread is about a half percent so it’s a half percent reduction. Okay. So that equates I mean, I guess you’d have to do a lot of calculations to how much interest how much principal because depends if you have 25 or 30 year but short version for every $100,000 you’re borrowing, that’s roughly about $15 Okay, for every quarter percent, so this $30.

Denny: Per month.

Alex:  For dollars per month, right for every $100 grand if there’s a half percent difference based on a rough estimate those rates, so three times $400 grand so we’re borrowing $400,000 a day, is that what we’re talking about?

Denny: Yeah, so $30 bucks a month per $100 grand times times 12 times five years. So per $100,000, you’re saving $1,800 per year. So if you have a $500,000 mortgage, that is a $9,000 saving, if you are getting a better rate because you’re putting less than 20% down.

Alex: Yeah, there’s some variances, but it’s a pretty close approximation. And the reality is, you know, in most circumstances, people are putting down less than 20% because they don’t have a choice. Now. Let’s play the devil’s advocate if you have 20% down, it’s actually better to avoid, avoid the insurance at that point for a variety of reasons. 

One, you will actually save more money in the long run for not having paid the insurance and you can do things like a 30 year amortization, HELOC, all sorts of different things. But your point is well taken, the fact is there is an interest savings so there is some benefit. And that whole expense isn’t necessarily in the toilet, so to speak.

Denny: Exactly. That was my point is that we’re looking at that $20,000 insurance premium is money down the toilet. Consider the interest savings. Consider the savings on that, you’d be paying in rent for that next year. 

Alex: It’s equity.

Denny: You’re paying $2,500 in rent over a five year period. Quick..

Alex: While you’re doing that, those numbers right now let’s come back to that really quickly. I want to share…

Denny: That’s $95,000 in five years.

Alex: There you go. A whole lot of money. I shared a graphic in a presentation I do for first time buyers. We do the second half of our conversation, we do a brief comment about presentation and one of the graphics is about equity growth. And I use an example again I used a million dollar property, probably spending about a half million but for the sake of conversation with a million dollar property and this property over the course of five years appreciates by 2.5% so way less than really what’s gonna happen but just to be conservative 2.5% 

That property million dollars is now worth $1.13. Okay, that’s what it’s worth based on two and a half percent appreciation on top of that. Now again, this gets harder because it depends on where rates are. But in the example I use two rates for I built this out when  rates were three and a half percent. You paid down almost $100,000 off the mortgage over the course of five years okay. 

So you’re paying off your loan, even if we say conservative $75 grand but you’re still paying off a fair chunk of change as opposed to rent so call it $100,00 grand because that’s what it is. And we got 1.31 value. So bring it all back together. We got $230,000 of equity gain, plus the down payment that you put to the property in five years. 

Right. So that’s pretty significant. All of a sudden you have your money plus that money you got $430 grand of additional equity in your property. Huge. So, again, I think it’s probably easier the podcast folks might not be able to see this, but what I’m trying to get to is that there’s a lot more to it than just paying for the insurance. 

So let’s get that mindset from cost to investment. You’re making an investment. It’s like, I’m gonna go on this, you hire a personal trainer. It’s not a cost for personal trainer, it’s an investment in your health. And that’s important to recognize because it’s not like you’re throwing it down the drain trying to buy, I don’t want to put anything terrible on the table here but you know something that’s like…

Denny: You bought a boat. 

Alex: Yeah, there you go. You’re not just trying to buy a boat or you know, something unnecessary, but you’re putting into something that’s going to help you improve so that’s always an investment so buying a house, it’s going to put you in a better personal position financially speaking so as an investment. So we need to get our minds wrapped around that. 

Denny: If you’re a first time buyer, seek knowledge from the professionals. Dad, who has been a high school teacher for the last three decades, probably is a great dude. Great dude. Really good dad, Coached all your sports teams, but it’s not the right person to seek investment, real estate advice from.

If you’re a first time buyer and you want to get into the market and you have questions about lending, chat with this guy here, Alex McFadden at Flow Mortgage Co. And call the GD Team because we are awesome and work with a lot of first time home buyers and we’d like to work with you.

Alex: Let’s Go!