The Burn Your Mortgage Podcast: Hope is Not Lost for Homeownership – Creative Options for First-Time Homebuyers with Alex Kjorven

Full  Transcript

Sean Cooper  

Hi, Alex, how are you doing today?

Alex Kjorven  

Great. Sean, thank you for having me.

Sean Cooper  

Great to have you as well. I think you're the first guest that's been camped out in the closet when doing a podcast, but definitely appreciate your commitment to getting the best, high quality audio recording possible.

Alex Kjorven  

I do it again, this is only because I've misplaced my air pods. You know what? We've gone through that. So hopefully we'll get some no other distractions.

Sean Cooper  

All right. Sounds good to me. So yes, we definitely have an interesting discussion here on the topic that we haven't really covered at any great depth in the podcast on Shared Equity mortgages. But before we talk about that, why don't we talk about some barriers to homeownership? I mean, I bought my house back in 2012. 

Sean Cooper  

And my gosh, I can't believe it's almost been 12 years now. But yeah, definitely the lay of the land has changed quite a bit since then. Affordability is, of course, a major concern with a lot of people. But yeah, why don't you talk a bit about some of the concerns that you're hearing from average Canadians today, some of the things that are stopping them from getting into a home when they would like to buy a home sooner, perhaps? 

Alex Kjorven  

Definitely, I think anybody who's in the trenches right now trying to go from renting to owning, doesn't need to hear it from me, they living it, they know exactly what the struggles are, I think for you having bought a home in 2012, right now, you must have feel like you got it for a steal compared to where property prices are now. And that's sort of exactly what's been happening. 

Alex Kjorven  

There's this growing divergence between income and real estate prices. And that is making it incredibly difficult for those who don't have access to, say, intergenerational wealth to break in the market. We know that 30% of Canadian home buyers are getting money from the bank of mom and dad to break in the market. And for those who don't have access to the bank of Mom and Dad, you're like, how are they getting into the market? 

Alex Kjorven  

Well, recent survey stats will tell you that it takes an average family making close to $260,000, a year 26 years to save enough for a downpayment to buy an average home in Toronto, which is just mind blowing. And so that downpayment gap is one of the biggest barriers towards breaking into the market, because for any properties over a million dollars, you need a 20% down. So that's it $200,000 Or close to a quarter million actually, if you factor in closing costs, worth of cash that you need to have on hand as one of the key barriers. 

Alex Kjorven  

And obviously, with interest rates, increasing mortgage affordability has also become an issue, there's definitely an erosion in terms of the amount of debt that buyers are able to qualify for now. And that's a more recent phenomenon. And obviously, a more transient one as well, too, as we do expect interest rates to stabilize. So the rising property prices, in disproportion to income, I would have to say are the biggest barriers for homeowners today. 

Sean Cooper  

Yes, certainly. I bought my house back in 2012. And I bought it for 425. And yeah, it's going for over a million now. So definitely, I feel the pain of people there. I mean, certainly, yeah, it is challenging to get into property these days, I think what most people are doing is their starter properties, like condos just to kind of get their foot in the door and looking to buy like outside of their desired neighborhoods. 

Sean Cooper  

Like if you're buying in the GTA, for example, like going all the way to a new market or an area like that, or Oshawa, when you might prefer to be downtown , people are definitely getting creative. But even then the properties like if you're looking for a detached home for under a million, it's still challenging in some of these neighborhoods here. So I definitely feel the pain of homeowners out there. 

Sean Cooper  

So certainly having a plan and actually being able to save that down payment is critical, whether it's staying at home longer with parents or taking in roommates, because yeah, if you're just living on your own, and spending a few $1,000 a month on rent is definitely challenging to actually be able to save that sort of money there. So yeah, thanks for your insight on that, Alex there. So I understand, Wade, that, like a challenge for a lot of Canadians, is actually coming up with the down payment. And there's interesting programs out there. The government had a program for several years that just wound it up here, called the first time homebuyer incentive. 

Sean Cooper  

But essentially, what that is, is a Shared Equity mortgage ownership pledge structure. So if you could talk a bit about that they're in general, and yet, even though the government's winding up, there still are options out there. So for anyone not familiar with that, if you could talk a bit about that structure there and a bit about the government program that was and how there are other programs out there and how they might be different from what the government was offering.

Alex Kjorven  

Certainly, yeah, I mean, to your point around the barriers getting in people's way to homeownership, people are getting creative. You know some of them, yes, there is the despair of feeling like you just can't break out of that cycle of renting and also trying to save for a down payment. But out of that has come some really innovative solutions. Homebuyers are looking at models ranging from CO ownership, like actually co buying property with friends or family and living in shared spaces with friends or family. 

Alex Kjorven  

Or there's other models like rent to own models where you can actually incorporate saving for down payment into your monthly lease payments. And then there's, they're these government programs. I hope anybody listening to your podcast is taking advantage of the first time home buyer savings program, you know, the merits of the TFSA program, and also are looking to access their RRSPs. There are a number of government programs. And the CMHC program that you mentioned has definitely been quite talked about, mostly because it was the government's attempt to bridge specifically that downpayment gap. 

Alex Kjorven  

So it's a Shared Equity mortgage program, it functions almost like a second loan, I have to say so the Government of Canada will contribute towards your down payment. And then in exchange, they get a share of the future appreciation. So it's not necessarily added to your mortgage. But you do, you are required to repay the amount that the government has given you for the down payment, when you sell your home or if you refinance your home, there is a ceiling if your property has appreciated significantly, you may not there be a scenario where you're capped at how much of that profit that you do have to share with the Government of Canada. 

Alex Kjorven  

But on the downside, if the property depreciates in value, you are still obligated to return a considerable portion of that upfront capital. So that's why it is more like a loan because there is that guaranteed repayment element to that program. So when you know, unfortunately, sadly, that program is being discontinued. Feedback that we have gotten is that it has you know, it can be useful for those looking to purchase homes in rural areas or places outside of urban centers. Because the program requirements itself were relatively restrictive in terms of the income requirements, there's a cap on income. 

Alex Kjorven  

And there's also caps on the purchase price of the home, which again, is very valid. And it could have been very attractive for those who are looking to purchase, you know, in rural areas where the average property prices are lower. Yeah, those are some of the programs. And then, you know, I'm here today to talk about the Shared Equity piece. So our borough is a shared equity investment provider. Our model is very similar to the CMHC program, except we're emphatic about Shared Equity being a true equity and in no way resembling a debt. What we mean by that is the shared equity investment provider. 

Alex Kjorven  

So Ourboro has equal rights and equal risks and rewards in this relationship. So our rule will contribute towards a down payment, we don't have income caps, we do have some eligibility criteria, which we can get into. But essentially, so long as you're looking for a property in our investment regions, our bill can contribute up to 15% of your down payment, or $250,000, towards your down payment. And depending on how we split that initial down payment, like say, you and I went halfsies on the down payment, then our bro will have a 50% share of the future profit in your home. 

Alex Kjorven  

And this has been a model that has been very popular in the US and even the UK, but our bros have been the first to bring it to Canada and to be able to operate it at scale. It's definitely gaining a lot of popularity for first time homebuyers looking for a way to break into the market when they don't have access to that generational wealth. You know, they don't have access to that $150,000 gift from mom and dad or from a family member to use for that downpayment.

Sean Cooper  

No, thanks for your insight on that, Alex. And what I'm hearing is that some of the key differences are that you're able to get a larger amount from our burl compared to like the incentive because yeah, there was a limit to how much money you could receive from the incentive. And it sounds like it's more flexible and could work in higher priced markets like Toronto and Ottawa. Am I hearing that correctly? 

Alex Kjorven  

That's right, in urban centers. Yeah. So thanks a tee up. So our rural we're currently our investment region is the Greater Toronto area as well as some other regions in southwestern Ontario like Kitchener, Waterloo, Hamilton, Guelph, and London. And we also just recently expanded our investment regions to Ottawa. So some of the major urban centers where, you know, we do feel housing affordability is quite a significant issue, but also in markets where we feel like there's a lot of potential upside. 

Alex Kjorven  

We know that residential real estate has been one of the most stable forms of generational wealth creation. So I mean, you said it yourself earlier, you bought a property just over 12 years ago, and that's almost tripled in value. And so that's an important tool. That's an important investment vehicle that more and more people should be able to have access to.

Sean Cooper  

Great. Sounds good to me. I'm glad that there's still an option out there after the incentive program was retired there by the Government of Canada. That's great to hear and maybe you can just Talk about you touched on this a bit here. But you mentioned just about qualification from the program offered by our borough. I mean, I don't want to bore people with a ton of details, but what are some kind of high level things people should be aware of like, Who do you think would be a good fit for this program? 

Sean Cooper  

It sounds like somebody that is struggling to come up with a downpayment, especially for that, like minimum 20% down over a million that can be challenging. They're like, Yeah, from an income down payment credit perspective, like who would you say would be the ideal fit for a program like this?

Alex Kjorven  

Yeah, so in terms of our eligibility criteria, it's quite broad, you need to be a Canadian citizen or permanent resident purchasing a primary residence in one of our investment regions. And we emphasize the principal residence piece because our company comes from, we operate with, we know quite a significant impact mandate in terms of trying to help people break into the housing market. And so our model is not yet for those who are looking to be landlords and to purchase that investment property for rentals. 

Alex Kjorven  

We want to help families own the homes that they're going to be living in. So you know, if there's a rental suite or something like a basement, that's completely fine that you want to rent out, you can do that with the properties you call on with us. But it does have to be your principal residence. From an income perspective, that's up to, you know, our lenders and our mortgage mortgage, when you work with our bro, you'll get connected with a mortgage broker with one of our lending partners. And that'll help determine whether your income is enough to qualify for the purchase of the property that you're looking to purchase. 

Alex Kjorven  

The main financial requirement for us is that buyers need to have a minimum of 5% saved. So that's their contribution towards the down payment. And that's in addition to extra savings that they'll need to have for closing costs. And then other in terms of not so much an eligibility criteria, but more like a good to know is that our program is really best suited for those who are looking for their starter home, not those who are you know, have found their forever home and this is it, this is the property that they see passing down to their children. And the reason for that is because of Ouroboro’s co ownership model, you can call with us for up to 30 years. 

Alex Kjorven  

So there is a ton of flexibility at any point during the 30 years, and you are completely free to sell the property whenever you want, regardless if markets are up or down. And so Arbroath markets are down and you need to sell out but we'll take that loss alongside you. That is a key distinction of our value proposition. And then also anytime during the 30 years, you can offer to buy out our brochure. But the reason one of our screening questions is, you know, how long are you planning to live in the home is because we know that, you know beyond say like the 10 years or so it could become really expensive to buy our brochure. 

Alex Kjorven  

Or if you're truly living in a property for 30 years, and you're selling at that at the end of our term, there is a lot of appreciation there that you're going to be splitting with our borough. So it really is in your best interest. If you know you want to stay in the home for a long time, you really want to have an exit plan in place in terms of how you're going to buy out our borough. Otherwise, we say to our buyers, like listen, the statistics are pretty clear. 97% of first time homebuyers are selling their properties before 10 years. In fact, like between five and seven years old, the vast, vast majority of people are moving into their next home. 

Alex Kjorven  

So even just the nature of how life changes is more likely than not, you will be looking for your next property. But those aren't, you know, there's the eligibility criteria and then there's just some of the guidelines that we give our buyers as well too, for those who don't know exploring Shared Equity as an option. Great, thanks

Sean Cooper  

for the interesting insight into that Alex and that's another topic that you suggested here that would be interesting to discuss is the option of like the the challenge for people these days getting into a home is first from the income qualifying perspective but also like for the downpayment perspective as well it sounds like our girl helps with the second one that downpayment perspective but yeah, I just wanted to touch on the income perspective here so maybe you can talk about the whole trend of CO owning the home with someone else such as a investor and and how that's able to help people get into homeownership sooner because yeah, certainly the the mortgage rates going up and as eroded affordability. 

Sean Cooper  

I mean, the good news is that rates are starting to head downward. But yeah, we're not at the level of pandemic level mortgage rates and I'm not sure if we'll ever get there again. So yeah, how can the whole coning the home with somebody like an investor help you get your foot in the door of the real estate market sooner?

Alex Kjorven  

Yeah, for sure. And I think like CO ownership as a concept is nothing new people have been co owning with friends and family and sharing spaces for as long as people have been buying real estate, but it's just the concept of CO owning with kind of like that silent investor with an entity that doesn't live in your property. And so you know, when more tongue in cheek about it, we're like okay, our bro we're professional co owners, right? We're here to professionalize this concept of CO ownership. 

Alex Kjorven  

And that can be quite a concept for people to wrap their heads around because a lot of sketches that we get are from those who are like, wait, what you're giving me $250,000. And there's no interest, I don't make monthly payments, I don't pay this back. It's like, no you don't, it's an investment, we get a return on our investment, when you sell your home for more than we paid for it. And if the price of the investment depreciates, then we take that risk, like that's the difference between making an equity investment versus a debt investment. If we were simply loaning you money, yes, we get interest payments, we get monthly payments, and our principal is guaranteed. But that's not our model.

Alex Kjorven  

 And we don't think Canadians need to be taking on more debt, just to be getting into their homes. So to your point around mortgage affordability, there, our value proposition is actually quite different. For those who are looking to purchase a property below a million versus those who are purchasing above, the argument for those purchasing above is quite straightforward, you have to have 20% down to buy a property over a million dollars. And it's just black and white, if you don't have 200. 

Alex Kjorven  

Plus, save, you cannot buy this property for people looking to buy below. So below a million dollars that, you know, you could potentially purchase a property with as little as 5% saved, you can have a mortgage for 95% of the value of your home. But what's happening as mortgage interest rates increase is that people are not qualifying enough to get 95 for like a mortgage, that's equal to 95% of the value of the home. So they're coming to our borough and to help bridge that gap. And that's actually a wonderful, quite an elegant solution. 

Alex Kjorven  

Because not only do we help you bridge that downpayment gap, but we're significantly reducing the amount of debt you need to take on to purchase your property. Even if you have 5%. Save, and you have a mortgage for the remaining 95%. There's still CMHC mortgage insurance on that. So anytime, as you may know, Sean, but you know, for your listeners, anytime you're putting less than 20% down in a down payment, you have to pay CMHC mortgage insurance. So with mortgage insurance combined, you could have, like, something like 97% of the value of your property could be debt, even though you've had significant equity on day one, it's just the way the mortgage insurance works. 

Alex Kjorven  

So we help people significantly reduce the amount of debt, they no longer are required to have to have mortgage insurance on that mortgage. And it reduces their monthly payments on their mortgage. So it's been quite beneficial. For those even shopping for properties below a million were at one point maybe buying on their own was an option. But that option is no longer available based on mortgage qualifications.

Sean Cooper  

No definitely sounds like a great potential solution for the right type of person there. And yeah, I really like the benefit that you mentioned about the whole equity piece. Because even if you can perhaps for to qualify to buy on your own like with the doesn't mean it works with everyone's budget, because when qualifying for a mortgage, the lenders don't take into account any other expenses you have like you might be caring for an elderly parent, or you might have like three or four kids. 

Sean Cooper  

And the funny thing is you can actually qualify to borrow more when it comes to mortgage lending if you're receiving government benefits, like the candidate benefit, but it doesn't take into account all the extra. I mean, children are nice and all that, but they come with a lot of expenses there and

Alex Kjorven  

gain on the revenue side with the kids. Yeah, exactly. So

Sean Cooper  

Yeah, like this sounds like a useful program for somebody where Yeah, they'd like to buy a home, but they're just going to be struggling with the carrying costs, because it's not just the mortgage payments, but the property taxes, the utilities, and the repairs, and maintenance can be a big one. So this definitely sounds like to make it more manageable for people from a cash flow perspective, they're where they're kind of finding it tough to keep up, especially with the rising cost of living as well. It's

Alex Kjorven  

really important math that people need to do, not so much math, but they have to wait, their personal situation and their finance situation, you know, against the trade offs of owning a home. And I think our bro is not a silver bullet. Like we're not saying that our product is for everybody. We're quite firm about our messaging and that if you can afford it, if it works for you, if you can make it so that you can buy this property 100% on your own, that is always still the better choice, you get 100% of the upside, you're not sharing any of those future profits. 

Alex Kjorven  

But when you don't have that choice, if it's either between renting indefinitely, versus just having some equity getting your foot in the door in the market, then co ownership is always like 10 times out of 10 Better than renting. Because you get equity when you are home, you know, in the past 50 years, even through the financial crisis, and even through the pandemic, residential real estate has increased at a stable rate. You know, like I mentioned, it's been one of the most reliable forms of long term wealth creation. 

Alex Kjorven  

And so to have that exposure, and then when you do sell your home those capital gains, those are tax exempt capital gains on your principal residence. You don't have that rate of return putting your money in the stock market, at least not tax free. So there's some important considerations but yeah, on that debt versus equity piece, people have to think about it you know, If you get the benefit, like when working with our bro, you are significantly reducing your monthly carrying costs on a mortgage, but you are giving up equity later on down the road. And that could be a wonderful solution for a lot. 

Alex Kjorven  

And for some people, there's a no, I'd rather like really no penny pinch and put all my money towards my mortgage so I can own this property all on my own, and then get 100% of the upside later. And that's a perfectly valid rationale and choice that people may want to make for themselves as well too, if they have that choice, right, if they are able to do that. Well,

Sean Cooper  

It's great to hear that our borough is still an option out there for people that it makes sense. And I think you did a really great job of laying out the pros and the cons so that people can have a good understanding and to make sure if it's right or not for them. They're so yeah, thanks so much for being on the podcast today. Alex, it was a pleasure to speak with you.

Alex Kjorven  

Yes, thank you so much for having me. It's always great to be able to chat, personal finance and mortgages and what's going on in this crazy market.

Sean Cooper  

Thanks for listening to another episode of the Burn Your Mortgage podcast. Besides being a podcast host, I’m also an independent mortgage broker. If you or anyone you know, family, friends, co workers or neighbors could ever use any unbiased mortgage advice or a second opinion, feel free to reach out. Email me at sean@burnyourmortgage.ca or call or text me at 647-867-3711 for a free mortgage consultation.

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