Give the gift of homeownership this season!

Housing prices and the cost of living are becoming a growing challenge for Canadians looking to enter the housing market. As a result, many parents are stepping into the picture to help their children secure their first property. This usually takes the form of a gifted down payment, a significant action that provides a huge boost to home buyers. Before deciding if giving the gift of homeownership is the right move, however, it’s important to understand exactly what it means and its impacts.

Why give the gift of homeownership?

You don’t need to be an expert in the Canadian housing market to know that housing prices have skyrocketed over the years, making it difficult for many buyers to enter the market. One of the biggest hurdles is contributing a down payment, simply because it is such a large upfront cost that can take a huge amount of time and effort to save up. At the minimum, a down payment must be at least five per cent of the purchase price of a home, but a down payment of up to 20 per cent is required in some situations, depending on the price of the home. A gifted down payment is when a close relative provides the amount required for the down payment for the buyer, allowing them to enter the market faster. Parents often want to help their children become home owners and start building equity, and a gifted down payment is the most direct way to do so. 

Important considerations for the gifter

Before committing to the idea of gifting someone a down payment, it’s important to consider all the factors involved. First and foremost, parents must evaluate their own financial health before deciding to help someone else! This includes their own income, expenses, and debts, as well as short and long-term goals related to retirement, travel, and home renovations. You don’t want to put yourself in financial trouble to help your child! 

It’s also essential to understand the difference between a gift and a loan. If you give the gift of homeownership, this means you are handing over the money without any expectations of reimbursement. This is because lenders do not want a borrower to be in debt to another person while they are also making mortgage payments. Open communication between the giver and receiver is important to ensure everyone is on the same page!

Lender requirements

There are of course certain rules you need to follow in order to give a down payment! For a high-ratio mortgage, for example, a gifted down payment must come from an immediate relative such as a parent. A high-ratio mortgage means a down payment is less than 20 per cent and the mortgage is therefore considered higher risk. For down payments above 20 per cent, many lenders are more flexible and allow a wider range of relatives to provide this gift.

Lenders will also need a signed letter from the gifter with a few key points. The letter must acknowledge the gift is not a loan, and it must clarify the relationship between the parties. Lenders will also need to see proof of the transfer taking place so they can ensure the money comes from a legitimate source and is not a result of laundering.

Helping a child buy a home with the gift of homeownership is a wonderful gesture, but it’s essential to take the time to think about all the implications involved. Clear communication and thoughtful planning is crucial to avoid financial trouble and facilitate a smooth transition. Be sure to contact a mortgage broker for help getting started with this process!

If you have any questions about your mortgage, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.