The season of giving is upon us. For some parents, that means snapping up Black Friday deals to ensure happy kids on Christmas morning. For others, it could mean forking out tens of thousands of dollars to help their adult children realize their dream of homeownership. Gifted down payments between family members are playing a larger role in today’s home purchases. And it’s no wonder, considering it now takes an average of at least six years for first-time homebuyers to save up the minimum down payment needed for their purchase. In housing hot spots like Toronto and Vancouver, the average saving time is many years longer (based on a 10% savings rate of the median pre-tax household income). As a result, almost half of today’s Gen Z and millennial buyers–47% and 46%, respectively–are relying on their parents for help with their mortgage, according to figures from Manulife Bank. Over the past year alone, that has amounted to an estimated $10 billion in down payment assistance from parents, or 10% of total mortgage down payments, according to CIBC economist, Benjamin Tal. And as home prices have soared over the last couple of years, so too has the size of the average gifted down payment, to a whopping $82,000.
What You Need to Know Are you or someone you know considering joining these statistics by helping an adult child with a down payment contribution? If so, here are a few pointers to keep in mind to ensure a smooth process…
This is a gift, not a loan. As the name suggests, a gifted down payment is just that, a non-repayable gift. There should be no expectation that the money will be repaid at any point; otherwise the lender would treat those funds as a loan, which would impact the borrower’s debt service ratios.
Note these restrictions. There are certain restrictions when it comes to gifting down payment funds. For example, some lenders won’t allow the property in question to be non-owner-occupied (i.e. a rental or investment property), and some gifted funds can’t come from outside of Canada (or the gift could be limited in such cases). And in most cases, you’re ineligible to gift funds if you’ve previously had a bankruptcy.
Keep good records. While most parents would probably be happy to simply write a cheque, lenders actually require additional documentation, such as a gift letter signed by all parties declaring that the funds are indeed a gift. They will also need confirmation of the amount of the gift and proof of the source of funds, as well as personal details of those involved (names, addresses and relationship of the parties). In most cases, lenders restrict down payment gifting to immediate family members, such as a parent, grandparents, child, sibling or legal guardian.
Today’s housing market presents unique challenges for young buyers wanting to purchase their first home, but there are almost always options still available. If you or someone you know is considering purchasing with the help of a family member, call us today so we can review the situation and determine whether a gifted down payment is the answer.