That is why an increasing number of parents are choosing to assist their children by gifting cash for home purchases.
Home prices surged in 2021 due to low mortgage rates. Although prices have slightly decreased with rising interest rates, they remain much higher than pre-pandemic levels.
As reported by the Canadian Real Estate Association, the average home price in September was just shy of $675,000, lower than the peak of the mid $810,000’s in February 2022 regardless these averages are still up from the low $500,000’s in late 2019
A CIBC report released earlier this year highlighted that more homebuyers are relying on parental financial support. The June report indicated that 31% of first-time homebuyers received assistance from family members, a significant increase from 20% in 2015. Additionally, the average monetary gift rose to $115,000, a 73% increase from 2019.
Gifting money can benefit homebuyers in several ways but it is not without a litany of key points to consider. Primarily It can reduce the required mortgage amount, leading to lower interest costs. It might also minimize or eliminate the need for mortgage loan insurance, which further saves borrowers money.
Let us look at some very important factors to consider when making the significant financial decision of helping your child with their down payment.
- Gift vs. Loan: Decide if you will give your child a gift or if it will be a loan. If it is a loan, consider the terms and repayment schedule. Most council will advise that If you plan to give your children money for a down payment, avoid making an outright gift. Instead, document it as a loan (deciding if it will be interest-free or not) and consider placing a lien on the property once it is purchased.
- Tax Implications: Gifts are not taxed in Canada, but it’s good to keep records. If it is a loan, ensure you document the terms to avoid potential tax issues. When gifting money, Wood there are typically no tax implications for the children, but parents should be mindful of any tax consequences if the funds are sourced from investments or family trusts.
- First-Time Home Buyer Incentives: Ontario offers programs for first-time home buyers, such as the First-Time Home Buyer Tax Credit and the Home Buyers’ Plan (HBP), which allows withdrawals from RRSPs. Ensure your child is aware of these options. For the HBP so long as you are still repaying your HBP, the first $500 of your contribution goes to HBP repayment, and the other $500 can be used to get a tax deduction/deferral. Once your HBP is paid off, the full $1,000 can be used to get a tax deduction/deferral.
- Down Payment Requirements: The minimum down payment in Canada is 5% for homes up to $500,000, and 10% for the portion above that up to $1 million. Properties over $1 million require a minimum of 20%.
- Mortgage Insurance: If the down payment is less than 20%, your child will need to pay for mortgage default insurance (CMHC insurance).
- Financial Stability: Ensure your child has a stable income and budget to manage ongoing costs like mortgage payments, property taxes, and maintenance. A good rule of thumb is to have 4%-7% of the purchase price to manage the ongoing costs above as well as closing costs.
- Impact on Your Finances: Consider how this support will affect your own financial situation, including your retirement plans.
Finally, and the most forgotten factor when choosing to assist your child with their down payment.
- Emotional Aspects: Discuss expectations and responsibilities with your child to avoid misunderstandings later on. The psychological and emotional toll gets extremely complicated if clear documentation does not exist.
In Hamlet certainly Shakespeare must have been alluding to loaning family money when Polonius warns his son Laertes and his daughter Ophelia: “Neither a borrower nor a lender be.” That may be a stretch but what is a Huron Blog without a bit to smile at?
With all these factors in mind, are you ready to navigate this journey or would you rather keep your peace of mind and let us handle the hard parts? Contact us at Huron Mortgages! Confidentially contact us today -> Click
Mathew Monks M18002043
Mortgage Agent Level 2
www.HuronMortgages.ca
Old University, Guelph
Matt@HuronMortgages.ca