The Rise of Gifted Down Payments
As home prices and interest rates soar, Canadian families are finding creative ways to support their children in entering the real estate market. Gifted down payments have become a popular strategy, with a significant percentage of first-time buyers benefiting from this assistance.
The Impact of Gifted Down Payments
A 2021 CIBC report reveals that 30% of first-time buyers in Canada received monetary gifts for down payments, ranging from $10,000 to over $1 million. James Harrison, Mortgage Broker at Mortgages.ca, notes that a considerable majority of his clients receive such gifts, emphasizing parents’ desire to aid their children in achieving a 20% down payment goal.
Changing Landscape: Gift Trends Over the Years
The average Canadian gift for down payments has seen a substantial increase, rising from $52,000 in 2015 to $82,000 in 2021. Notably, Vancouver leads with an average gift of $180,000, followed closely by Toronto at $130,000.
Understanding Gifted Down Payments
Definition of Gifted Down Payments
A gifted down payment is a financial contribution from close relatives, such as parents, grandparents, or siblings, towards a home purchase. Unlike a loan, it is non-repayable, and those giving the gift should have no expectations of repayment, often formalized through a signed agreement.
Gifted Down Payments vs. Co-signing
Gifted down payments do not confer ownership of the property or assume any associated risks, distinguishing them from co-signing arrangements. Co-signing entails being on the property title, bearing 100% liability if homeowners default on their mortgage.
Impact on Mortgage Approval
Gifted down payments do not affect mortgage approval. The loan amount you qualify for is determined by your income, and the down payment is an additional factor. A larger down payment can potentially enable you to afford a more substantial property and move from an insured to a conventional purchase.
Navigating Gifted Down Payments
Rules and Requirements
To formalize a gifted down payment, a mortgage gift letter is essential, with each lender providing its template. Proof of the gifted funds’ deposit into the recipient’s account is required, typically no later than 15 days before closing. Compliance with anti-money laundering laws may apply, depending on how the gifted funds are utilized in the transaction.
Using Borrowed Funds for Gifting
While it’s possible to use borrowed funds for gifting, it’s a less common practice. Approximately 5.5% of gifting parents use debt for financing. Caution is advised when using a line of credit to avoid excessive debt, especially if nearing retirement.
Tax Implications
In Canada, gifted down payments are not taxed, and immediate family members can provide gifts without tax implications. However, considering protection for the gift in case of a recipient’s relationship dissolution is recommended by experts.
Planning for Down Payments
Protecting the Gift
Harrison suggests considering protective measures for the gifted amount in case of a recipient’s separation from their partner to prevent potential division.
Further Down Payment Planning
For additional information on down payment planning, exploring options such as RRSPs, TFSAs, and FHSAs is recommended.
Conclusion
Entering the real estate market can offer various benefits, and supporting immediate family members with a down payment is a noble way to help them embark on their homeownership journey. While this article provides valuable insights, it is essential to consult with financial or legal professionals for personalized advice.