Members of various demographic groups shop for mortgages in different ways. Do the contrasts in the way the baby boomers and the millennials shop for mortgages tell us something about modern home buying? You bet.
A pair of mortgage professionals recently took time to chat about the way Canadians of different generations think debt and mortgages. The younger of the pair, Harry McCallum is a mortgage agent with SafeBridge Financial Corporation. As a twenty-something he self-identifies as a millennial. He's noticed generalities about how it is his peer group shops for a mortgage.
They do definitely shop a bit differently. You'll see a lot of online research. A lot of the people will say, 'I was researching on ratehub.com. I was looking online and found this rate posted. Can you match that?'
Their first step for any purchase is to go online and do some research before they talk to anyone. McCallum calls them smart shoppers:
Millennials are definitely online and shopping around. They seem to be visiting more than one person. Many of the people I talk to say they come as a result of a referral from a realtor. Or they'll shoot me an email and say they've already spoken with another broker and their bank. And then they'll come back and ask what I can do for them.
Today millennials number over 9 million in Canada, or 27% of the population, and 80 million in the United States.
This makes them the single largest demographic on the North American continent. The leading edge of this demographic are now in their middle-thirties. They're just now coming into the home-buying years. Compared to Gen X and baby boomers millennials have had a tough time financially. They graduated with more debt than any other generation. Many entered the job market as the Great Recession of 2008 settled in. That means they are careful about who they give their business too.
One trait of millennials according to marketing experts is that they look for institutions they can trust. They don't fall for marketing gimmicks. They poll peers, and reference crowd-sourced ratings sites in a search for organizations that have built up a good reputation among clients. The glitzy advertising bounces off their net-informed psyches. They want to see real value in their service provider. To that end, McCallum talks up the benefits a mortgage broker can provide.
As mortgage brokers we definitely need to find a way to add some value. Mortgage rates are what they are. You need to distinguish yourself through a 'value add'.
To do that he takes the time to walk a client through the mortgage buying process, and then stays in contact after the sale is complete, which is not always the case with a mortgage rep at one of the Big Five Canadian banks.
At the end of the day I want to educate and advise. I'm not just selling them a product. I'm educating the client and helping them through the process. I'm explaining the pros and cons...and I keep contact with them after. Generally I'd like to be in contact five or six times over the course of the mortgage.
Having dealt with many millennials during his time in the business he has also noted the mistakes those in his peer group make. Online savvy aside, some in the younger generation overweight the magic of online searches. They end up focusing only on posted rates. They end up overlooking key pieces of the larger puzzle.
Sometimes they'll miss one important detail. They often don't realize that only the very best credits get the lowest rate posted by a bank. Only 1 per cent of people can get that lowest rate. Most millennials will be first-time home buyers and they won't get that rate. They have to be educated about that.
There is a learning curve when it comes to shopping for a mortgage. That is, it's about more than just a rate. As McCallum puts it, "the lowest rate might not be the best for you." It helps to understand that a bank or among online lender structure penalties in different ways if a mortgage is broken.
If you're in a fixed mortgage and you have to break it you might have to give three months interest or make a payment that makes up for the interest rate differential. If rates have gone down, you'll pay the differential. And when the banks calculate that differential they use the posted rate, not the discounted rate that you've been paying. That makes the penalty go up substantially.
It's a detail only a mortgage shopper that has sat down with a professional will understand.
A monoline like M-CAP will use the contract rate to calculate the cancellation fee. That can save you $10,000 if you have to break the mortgage. That's one of the things that the banks won't do. These are the tricks that a mortgage broker knows.
How do the millennials compare to the way baby boomers shop for a mortgage? David Smith, a director of Oriana Financial Group of Canada Ltd., identifies with his peer group, the baby boomers, those born in the late 1940s and '50s. This generation has dominated the post-war economy in Canada (even if they are now outnumbered by millennials). They have slightly different approach to mortgage shopping.
It's true millennial do a lot more research. They're used to using the internet for everything. I would say they are smart shoppers that way. They aren't going into it blind. But baby boomers are not like that. Boomers will go to the net for information. But they tend to still want to sit down and talk to someone about their situation.
Smith says this different approach to mortgage shopping goes back to their formative experiences that formed their attitudes toward debt. The lessons passed along from their parents have stuck with them.
Boomers grew up with Great Depression-era parents. For that generation – that Bob Hope era – owing money was a social stigma. They grew up in plenty but under a heritage of thrift. Among boomers the number of gifted down payments was almost nil. They had to save that money themselves. We couldn't ask those tight wads for help in that era, they were so worried about their money.
Of course, attitudes have changed since those days, Smith notes that now we have the millennials, who get to borrow money cheaply and are typically gifted down payment. He also notes that 48% of first home buyers get some sort of family assistance.
Millennial moving into real estate have had it kind of easier. Their jobs may be less fulfilling, but rates are lower and they're getting help...They are coming in with a certain amount of privilege. It's not say they are impulsive, but it's not the attitude toward debt the last generation had. This generation is not scared of debt like the boomers were.
Smith worries like McCallum does that millennials rely too much on their online searches, and so overlook the benefits of real advice.
There are questions about mortgages that, if you're banging around out there on the net all by yourself, you are not going to be aware of. Can your mortgage broker help if you lose your job? There are remedies for that. You don't know what questions to ask beyond price. And that's a very important point. You're making the biggest financial decision of your life and so to disregard anyone with advice on that because you have an app on your smartphone... that can be dangerous.
We've been encouraged by credit cards to take on debt. And maybe this is the real difference between generations. Millennials have grown up in an era of low interest rates. They've grown up in a world of long-term artificial low rates. And so they take on huge amounts of debt and are okay with paying on that. But boomers came of age in an era of high interest rates and so they tend to save and invest. The changes in attitudes toward debt may have consequences for the younger generation according to Smith.
Sitting down with an expert who can take someone through the various mortgage products (especially in an era when it seems interest rate may be set to rise) is an important part of the process.
Smith is of the opinion boomers were more cautious and more respectful of those more knowledgeable.
There is real difference between generations. It's a consequence of the information age I suppose. The millennials haven't leaned the difference between knowledge and understanding. They haven't learned that while they can get information about price online, they won't find value. There is a difference between price and value, and between information and wisdom.