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Shopping for Mortgages: Millennials versus Baby Boomers

Shopping for Mortgages: Millennials versus Baby Boomers

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 the 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?'

Millennials

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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 rating 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.

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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.

The Boomers

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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 a 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.

Millennials 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.

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Sitting down with an expert who can take someone through the various mortgage products (especially in an era when it seems the 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 learned 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.

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Jim Burtnick: Toronto’s Real Estate Continues to be a Safe Investment

Jim Burtnick: Toronto’s Real Estate Continues to be a Safe Investment

For anyone expecting to see a downturn of Toronto’s housing market, the Canada Mortgage and Housing Corporation says 2017 won’t be the year.

At a recent condo seminar held by the CMHC, the group laid forth it’s predictions for the upcoming year. Jim Burtnick, a member of Torontoism, broker and senior vice president at Sotheby's International Realty Canada, was in attendance. He says CMHC is pointing at rising prices and a somewhat dwindling supply, but the health of the market is expected to remain strong.

CMHC sees sales coming in somewhere between 100,000 properties sold and the 113,000 we saw in 2016. Burtnick says that’s not enough to call it a retraction.

Not so much a slow as a maintain-where-it's-at. I mean, the difference between 110,000 and a 113,000 sales is not huge. That is three-thousand less than last year. So almost basically the same and it would be the third straight year where sales were above 100-thousand sales.

Shrinking Vacancy Rates And Condo Bidding Wars

One of the biggest impacts we’ll see in the coming months is on the rental market. CMHC says competition for condo rentals remains high.

"Literally there are people lining up," says Burtnick. "Like if you put a condo out for rent you're getting multiple people bidding on it."

About 80,000 people move to the GTA every year. They come from overseas – Toronto attracts the highest number of immigrants in Canada – or from other provinces like Alberta and Newfoundland & Labrador where the falling price of oil has impacted those economies. That creates a lower vacancy rate.

Currently, as Burtnick points out, the vacancy rate is below one percent. But that could drive more builders into the sector.

A healthy market is somewhere in the neighbourhood of 4 percent. So you're actually seeing some of these pension funds getting into the rental market and they're building new purpose-built rental properties because that's going to give them the kind of ROI on their fund that they need to finance their pensions.

Another of the CMHC’s predictions shows apartment resale inventory is dropping. That can lead to bidding wars, according to Burtnick, because there’s less condo inventory available.

He says that Toronto used to have around a 4-month supply of condos ready for new buyers, now that supply has dwindled to around 1.5. Because there are simply fewer options, people are willing to spend more.

READ MORE: WHO ARE THE CONDO BUYERS IN TORONTO?

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Affordability And Rising Prices

While prices may not rise as much as they have in the last couple years, they’re still expected to head higher. That creates a problem for many first time homebuyers whose income is outpaced by the price of a new home.

High prices are causing more people to look at the GTA’s suburbs as a viable option for home buying. CMHC shows prices rising in the areas surrounding the downtown core by more than 20 percent, while Toronto-proper–where prices are already high–is expected to see a hike of a little more than 14 percent.

"The city's become so expensive that the only options are outside the core so more people are looking out there and that's driving up the price outside the core," says Burtnick.

The CMHC also shows that high prices throughout the GTA are effectively pushing some would-be buyers out of the market. The downpayment for a home costs more than the average Torontonian makes.

Toronto's becoming a city like Manhattan in New York, where you've got to have a lot of money to be able to afford to live there. They're suggesting that, just based on fundamentals of people's actual income versus the purchase price, it's becoming problematic.

But what the CMHC’s numbers don’t show, according to Burtnick, is an increasing reliance on the Bank of Mom & Dad.

"A lot of parents are helping kids get into the marketplace," says Burtnick. "So even if their income isn't enough to justify the purchase price they're supplying typically a health deposit so they can get a foothold on the real estate market.

There was a period a few years ago when many believed too many buildings were being built. It fed into fears of a bubble in the real estate market. Even today Burtnick says it’s not uncommon for people to point to the number of construction cranes and say the sky is falling.

But if supplies are dwindling to the point that bidding wars are common, or that it’s causing prices to rise so much that the average person simply can’t afford it, shouldn’t that show that we’re not building enough? According to Burtnick, neither is true. When he looks at the CMHC numbers he sees the city growing to fit it needs.

Certainly if you look at the overbuilding aspect, we're not overbuilding in any stretch. We're basically maintaining our natural need based both on immigration and based upon natural birth and death rates.

The reason that prices continue to rise in the GTA, putting even more pressure on buyers, is a lack of supply according to Burtnick. Getting through the approval process for new buildings simply takes too long.

"It’s taking too long for developers to get projects approved and shovels in the ground so that they can provide new inventory."

Students from all over the world seek education in Ontario
Students from all over the world seek education in Ontario

Read more: top 6 universities for international students in ontario

Employment Growth vs. Shrinking Dollar

Looking at the broader picture, Canada’s unemployment rate continues to plummet, but the dollar has also stagnated around 76 cents to the US dollar. Burtnick sees that as a potential boon for Toronto’s housing market.

"What a lower dollar means is certainly Canada becomes more attractive from a point of view of an exchange rate," he said. "So from a foreign point of view it makes us look on sale and relatively inexpensive."

He points out that this could attract foreign buyers, but just as likely their may be Canadian expats looking to return to the market.

"They might see this as an opportunity to get a good bang for the buck, especially if they're getting paid in US dollars."

The tumult south of the border could have a further impact for the region as well. Canadian universities are reporting an influx of applications from the United States. A poll by the Globe and Mail reports a spike of between 20 and 80 percent for the 2017-18 academic year compared to the previous year.

But while it may be easier for students to come here, Burtnick doesn’t anticipate as many people coming looking for jobs.

It's not like they can just come here and start working right away if they need to work. Because you'd have to have a work visa if you're not a Canadian citizen. I think some people are looking for education coming up here. Certainly our education system is a lot more affordable than the US.

Toronto is experiencing influx of new residence not only from foreign countries, but also from other parts of Canada
Toronto is experiencing influx of new residence not only from foreign countries, but also from other parts of Canada

The Interest Rate Question

One of the big questions over the last few years, and one that will continue into 2017, is when will the Bank of Canada raise interest rates? BoC governor Stephen Poloz has intimated that he has no plans to move rates given the unpredictable times we’re living in. But as Burtnick points out, the U.S. Secretary of Treasury Janet Yellen has intimated she could see as many as three rate hikes throughout the year.

That would attract investors to the U.S. bond market and although the Bank of Canada hasn't raised their benchmark rate, for banks to raise money for mortgages they're going to have to offer a better bond rate for people who are putting up the money for these mortgages. So if the US raises their benchmark rate I can see our mortgage rate going up.

Regardless of what happens on the international stage, Toronto’s housing market still looks like a safe investment to many buyers. An equilibrium has been reached between supply and demand that creates opportunity for investors, but still leaves some room for new buyers to join in on the fun.

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