Deposits offered: how does it work?
With average home prices at an all-time high, Canadians are having to shell out more money for homes than ever before. In response, mortgage experts say they’ve seen more and more parents offer down payments to family members to help cover the initial costs of buying a home.
Based in Surrey, BC, Mick Gill is an Accredited Mortgage Advisor with Dominion Lending Centres, a national mortgage and leasing company. Even before the COVID-19 pandemic, he said steadily rising house prices across the country had led to an increase in the prevalence and size of gifted down payments.
“Affordability is becoming a huge concern now, so it’s become more and more commonplace,” Gill told CTVNews.ca in a Thursday phone interview. “And the dollar amounts have certainly gone up in terms of the amount of installments gifted these days… We’re now in the hundreds of thousands.”
Parents often contribute enough money to help their children cover a down payment that amounts to 20% of the purchase price of the house, said Shubha Dasgupta, president of the chapter’s board of directors. Association of Canadian Mortgage Brokers Association. Buying a home with a down payment of less than 20% will require mortgage loan insurance, he explained, an additional fee aimed at protecting lenders in case buyers are unable to make their monthly mortgage payments. .
“Over the past couple of years, because we’ve seen real estate prices and house prices rise at an accelerating rate…many parents see this as a way to support and help their children,” said Dasgupta told CTVNews.ca in a phone interview Thursday. “That 20% is like a threshold where parents try to get their kids into what is an insured mortgage and [avoid] having to pay a mortgage loan insurance premium.
Mortgage Professionals Canada board chair Joe Pinheiro, who is based in Toronto, said gifted down payments have become especially common among first-time homebuyers looking to enter the market. A report released by CIBC in October 2021 found that nearly 30% of first-time home buyers had received down payments from family members in the previous year. Additionally, about two-thirds of first-time homebuyers who received a gift said cash made up the bulk of their total down payment.
“For a lot of people, the gifted down payment is the only way to get into home ownership,” he told CTVNews.ca in a Thursday phone interview. “Buying power has dropped dramatically for many shoppers, but prices have gone up, so to close that gap, they have to go to mom and dad.”
According to the CIBC report, the proportion of first-time homebuyers in Canada who have received down payments from family members has steadily increased since 2015. With this in mind, Dasgupta, Gill and Pinheiro outline the key considerations that should be taken into account for those looking to give or receive a gifted down payment.
WHAT DO YOU NEED TO PREPARE A GIVEN DEPOSIT?
In order to grant a gifted down payment for a home, all parties will need to sign a mortgage gift letter, Gill said. Most lenders will use their own version of this document when preparing the donation, although the format is similar between lenders, he said. It will describe the names of those giving and receiving the gift, as well as their relationship to each other and the amount of money being offered for the purchase of a home. The letter will also include their signatures and contact information.
Lenders will also require proof that the money has been deposited into the borrower’s bank account, whether by direct deposit or bank draft. This is to ensure full transparency around the flow of funds and help verify where the money is coming from, Pinheiro said.
“Be prepared to demonstrate to the lender exactly where that down payment came from,” he said. “Sometimes the money given can be laundered, so there’s a responsibility to make sure it’s a genuine gift from the source they claim it came from.”
Funds must be transferred at least 15 business days before the mortgage closing date, Dasgupta said, and delivered directly to the buyer.
WHO CAN OFFER A DEPOSIT?
When it comes to giving down payments for a home, the money should come from an immediate family member, Gill said. This includes parents, grandparents and siblings.
If the money is offered by someone other than an immediate family member, such as a friend or colleague, then they can expect it to be repaid at a later date, Gill said. . However, a donation is considered a non-refundable sum of money.
“What lenders would worry about is that if you have a friend or someone else who is not an immediate family member giving you that money, there are probably repayment terms that don’t are not disclosed,” Gill said. “It’s not that common for someone outside of your family to just give you money and not ask for it to be paid back at some point.”
If someone like an aunt, uncle or other close family member donates money, there must be a clear reason why they would do so, Pinheiro said.
“Anything other than [parents or grandparents]lenders, understandably, will want to see more documentation and evidence that supports this as an outright giveaway,” he said.
IS A DONATION CONSIDERED AS A LOAN?
Since this money is given as a gift, it is not considered a loan, Gill said. This is part of the reason why only immediate family members are eligible to give installments – if the money came from someone else, chances are there’s some sort of arrangement for repayment, which would then classify the transaction as a loan, he mentioned. In the case of a donation, there is no refund involved.
This means the gift does not impact the borrower from a liability perspective, Dasgupta said. In other words, the buyer has no other debt to pay that could potentially compromise their ability to pay off their mortgage. Loans are not only repayable, but also impact mortgage applications, unlike donations, he said.
“If they have other debt that they have to pay off if it was a loan, that affects their ability to make the mortgage payment,” Dasgupta said. “The mortgage lender wants to know that if they get that money, they don’t have to pay it back [and] it does not affect the client’s ability to repay their mortgage.
Additionally, gifted installments are not taxed, Dasgupta said.
“Canada is one of the few countries that does not have tax implications on the gift of an immediate family member,” he said. “A parent is able to provide this to their children without any tax implications on either side.”
IS THERE A MAXIMUM AMOUNT THAT CAN BE DONATED?
There’s no limit to the amount of money that can be offered as a down payment, Gill said. However, the higher the amount of money offered, the more the lenders will be required to monitor the payment and the risks associated with it, he said.
Even if they receive a gifted down payment, homebuyers will typically put some percentage of their own money down when buying a home, such as 5 or 10 percent, Gill said. If most of the down payment is donated money, lenders will have to consider whether those planning to buy the home can really afford to meet the long-term mortgage payments, he said.
“Have they enough of themselves [money] to really be able to take responsibility for the mortgage? Gill said. “There must be some rationale behind it.”
There are, however, situations where family members will cover the full cost of a down payment for a house with donated money, Dasgupta said, provided it is accepted by the lender. But it comes with additional risks, Gill said. If a divorce, job loss, or other life status change causes the deal to fall through, the buyers themselves have little or no liability.
DOES A GIVEN DEPOSIT GUARANTEE A MORTGAGE APPROVAL?
Just because someone gets a gifted down payment doesn’t mean their mortgage application will automatically be approved, Gill said. Applicants are still expected to meet the necessary requirements to qualify, just like anyone else applying for a mortgage with no down payment. This includes proof of solvency based on income and expenses, Pinheiro said.
However, gifted down payments will often help buyers qualify for higher mortgage amounts, he said.
“In this market, you may not qualify for the ideal home you’re looking for, but with a down payment that reduces the mortgage amount, you now qualify,” Pinheiro said. “So it’s not guaranteed, [but] this helps with qualification.
It also gives homebuyers more options when looking in the market, he said.
WHAT ELSE IS THERE TO CONSIDER?
The biggest consideration to keep in mind for those making down payments is that you should never expect that money to be refunded, Gill said. Also, anyone donating a down payment is not entitled to ownership of the home – it will not be registered on the title or on the mortgage.
“You can’t come back three or four years later and say, ‘We loaned you $200,000, we’d like it back’ or ‘You sold your house, we’d like our money back.’ Gil said. “That’s why the banks will have a gift letter saying it’s non-refundable.”
Pinheiro also advises his clients to know exactly where that money comes from and how it is provided, he said. If parents are looking to remortgage their homes in order to give their children a down payment, for example, they should consider whether they will be able to meet their debts, he said.
“If you’re 65 and have $300,000 drawn down on your line of credit, you need to make sure you’ll be able to afford those payments,” he said.
Meeting with a mortgage broker ahead of time can be helpful to determine if someone has enough funds to donate in the first place and to answer any questions about the process, Dasgupta said.
“Understanding what options are available and whether they are financially viable for them would be a good head start in this process,” he said.