Thinking of giving a down payment this holiday season? Here’s what you should know

With the holiday season in full swing, many Canadians focus on gift-giving. For some, it means helping loved ones buy a home by contributing to their down payment.

If so, you’re not alone. In recent years, gift-giving has become more common. High living costs have forced many Canadians to seek help from loved ones to get their first mortgage.

In 2024, 30% of first-time buyers received gifts for their down payment, a Canada Mortgage and Housing Corporation survey found.

A study by Mortgage Professionals Canada found that 60% of buyers who got financial help couldn’t afford their homes without it.

“For first-time homebuyers, that percentage is way up. From my book of business, it’s 65% or 70%,” notes Tracy Valko, Principal Mortgage Broker with Valko Financial. “The high rate of inflation we’ve had and the high cost of living limit the amount young people can save now for a down payment.”

Down payment gifts are no longer for first-time buyers.

Valko sees more people relying on gifts to secure homes as they move up the property ladder. For example, young families want to buy larger homes as they have children.

“Move-up buyers” are a group of homebuyers. They have relied on their own resources for many years to buy larger family homes. But, with rising home prices and tools like the FHSA for first-time buyers, they feel the strain.

“They’ve got great equity. They’ve built it up over five years. But, it’s not enough to get them there. It’s not enough to qualify or afford it with the high rates,” adds Valko.

What you need to know when giving a down payment.

If you’re considering helping with a down payment, it’s important to be aware of the risks.

Tip #1:

A top priority is to ensure your loved one discloses the gift to their broker and potential lender. This may add complexity. Some lenders may distrust gift money. But it can prevent major issues later. These include a denied application or, worse, an unaffordable mortgage after qualification.

A CMHC survey found that, in 2024, the average size of down payment gifts in Canada soared to $77,487. In high-demand markets like B.C., the average exceeded $150,000. This increase reflects a shift in the risks of first-time homebuyers’ mortgages.

“I’m seeing many borrowers with six-figure gifts,” says Clinton Wilkins of the Clinton Wilkins Mortgage Team.

“Imagine you’re a first-time homebuyer. Your parents are giving you over $100,000,” he said. “People are coming in with large gifts and using conventional mortgages.” Years ago, first-time homebuyers got a high-ratio insured mortgage from the CMHC. So, it has changed the nature of first-time homebuyers a bit.”

Tip #2:

Another important step to cut the risks of gift giving is to address how the parties will handle the gift if the mortgage needs to be unwound. It’s not the most festive topic. It’s best to tackle it after the holidays. But, it’s crucial to know how to protect a gift in case of a divorce or asset division.

No matter your intent for your child’s gift, you must collaborate with your loved one and their spouse. You must clearly document your wishes in a binding agreement. “Make sure you’re speaking to your real estate lawyer,” says Valko. “I’ll tell you. Many clients have split up. They thanked me for having this in place. I’ve seen what happens without an agreement.”

Valko explains that disputes often arise during separations. This happens when couples do not agree on gifted down payments. “The wife’s parents gave $200,000 and she’s got to split the equity… It’s heartbreaking.”

Tip #3:

A final, often-overlooked risk for gift givers is to avoid gifts that could harm their financial stability. It’s natural to want to help loved ones. But overextending your resources to support their homeownership goals could harm your nest egg.

A 2020 survey by the Canadian Institute of Actuaries found that many Canadians underestimate both the length and cost of retirement. This may lead them to overestimate their ability to give. To avoid this, check the gift’s impact with your planner or mortgage professional.

For those with financial security, a down payment gift can provide significant benefits. This is due to the careful risk assessment and the steps taken to give it.

“I appreciate, from the gift-giver’s view, that it helps achieve a dream of homeownership.” “They can celebrate that with the gift receiver while they are still alive and able,” adds Wilkins. “I hear so many people say, ‘I wish I had done this 10 or 20 years ago.’”

Check this article