First-time buyers plan
Navigating the world of Canadian home buying
Gifting a down payment - the scoop!
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 ten years for first-time homebuyers to save up the minimum down payment needed for their purchase.
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’s 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
Have your parents suggested possible help 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 me today so we can review the situation and determine whether a gifted down payment is the answer.
Step 1: Figure out how much you can afford.
Falling in love with a house you can’t afford can be heartbreaking. Avoid disappointment by figuring out your budget before you start looking.
- First, decide how much you can afford for your down payment. The Home Buyers Plan lets you withdraw up to $35K per person (or up to $70K per couple) from your RRSPs – tax-free – to be repaid over 15 years. The bigger your down payment, the less principal you will owe, and the less interest you will pay. Check the CRA website for the most recent details.
- Don’t forget about closing costs, like insurance, legal fees, home inspection costs, land registration and land transfer fees. Add those to your moving expenses and service hookup fees, and they can add up surprisingly fast.
- Your monthly housing expenses (mortgage, taxes, heat, etc.) shouldn’t use up more than 32% of your income. (If your combined monthly income is $5000, for example, 32% of that is $1600.) If you have car payments or credit card debt, the rule of thumb is that debt repayment shouldn’t be more than 40% of your income.
- Get pre-approved for your mortgage. It’s a good way of finding out how much you can borrow – and it speeds up the process once you’ve found the home you want to buy.
Step 2: Figure out what type of home is right for you.
Step 3: Decide where you want to live.
Living in an area you like is as important as buying a home you love. Do you want a busy urban lifestyle, a house in the ‘burbs, or a quiet place in the country? Do you want to walk to work or are you okay with a longer commute? Do you need to be close to good schools? Rec facilities? Shopping?
Step 4: Start looking.
Go to open houses. Visit susanginou.com. Check the classifieds. Drive around neighbourhoods you like looking for For Sale signs. Talk to me about your needs and start looking at properties.
Step 5: Build a team.
Put together the right group of experts to help you buy. Start with a REALTOR® with a track record you can trust, then look for a reputable lender or mortgage broker, a lawyer , a home inspector and an insurance broker. I work closely with all of these professionals, and will be happy to recommend people you can depend on.
Step 6: Make an offer.
You’ve found the perfect place – now it’s time to make an offer. An offer to purchase includes the purchase price you’re offering, chattels to be included in the purchase (like appliances or light fixtures), the amount of the deposit, the closing date and any other conditions.
Your REALTOR® will help you prepare your offer, and will present it to the vendor, who will either accept it or make a counter offer (which asks for a higher price or different terms). You can accept or reject the counter offer. If everyone agrees, the home is yours. If not, you can make another offer, or you may have to keep looking.
Step 7: Get a mortgage.
Once you’re approved, you’ll need to decide what type of mortgage works best for your needs. Will you go with a fixed or variable interest rate? Will your mortgage be closed or open? What will your amortization period be? Will you make payments monthly, biweekly or weekly? Your mortgage broker or lender can help you find a mortgage that suits your needs – and saves you the most money in the long term.
Step 8: Move in and enjoy!