4 Things to Remember About Gifted Down Payments

November 23, 2021

Key points:

  • The amount of home buyers receiving gifted down payments is rising, as is the amount they are being gifted
  • It’s important to clarify whether the funds received are a gift or a loan that is expected to be paid back
  • Put agreements in writing to clarify the process

Beware of the gifted down payment

Today’s video focuses on the rise of the gifted down payment. These are funds given by one person to another, usually a relative, to help them purchase a home. While the trend of gifted down payments is on the rise, there are some key things to consider before offering, or accepting, this gift.

Don’t feel like watching? Find the full transcript below!

Chris: [00:00:10] One of my favorite economists here in Canada – yes, you can have a favorite economist – Benjamin Tal from CIBC, recently released a report regarding gifted down payments in Canada that I wanted to quickly review with you. So fall of 2021, Benjamin Tal released this InFocus paper called Gifting for a Down Payment Perspective. There’s some good nuggets in here that are worth discussing, but I’m going to keep it brief and just highlight one important thing about the amount of gift that is being received here in Toronto. 

Gifted down payments are on the rise

Chris: [00:00:49] So, it says here the average gift in Toronto during the first three quarters of 2021 is now estimated at more than $130,000 for first time buyers, while mover uppers enjoyed a gift of almost $200,000. In his study, he also is suggesting that approximately one third, so 30 percent of first time home buyers, received a gift. Anecdotally, I agree with that number and would suggest that in the city of Toronto now – that’s a cross-Canada number – I think in the city of Toronto, that number is a little bit higher. And one of the things that that chart or that report is confirming is that as housing prices get more expensive, we are seeing a rising percentage of gifted down payments. So based on what we expect to happen in the future with Toronto real estate, it’s safe to say that we will see more and more gifting. So in anticipation of that, I want to share with you really four best practices when it comes to gifting, just something to think about and prepare as you discuss purchases with family members and what they might be contributing.

Make the distinction between a gift and a loan

Chris: [00:02:04] Number one, you want to clarify if the funds are to be a gift or a loan, and that seems so obvious, but you’d be surprised the number of times that this gets misunderstood, especially when real estate is appreciating, a property is sold. All of a sudden, a family member could come back and say, “Hey, you know that gift we gave you? You know, your property went up 50 percent over the last five years. We want the gift back, plus.” And it’s a good idea to make sure that that is clear when you discuss with family members.

Establish a prenuptial

Chris: [00:02:40] Number two, if the funds are being given to a couple buying together, it’s really, really important to establish a cohabitation agreement or prenuptial. And I mean, every relationship is expected to last forever. But the reality is the numbers don’t lie, that not every relationship is made in heaven. And so in the case of a relationship breakdown, you want to have an established agreement beforehand.

Form a plan

Chris: [00:03:10] And that leads me to tip number three, which is to establish exactly what happens if a relationship does break down. Without a prenup or an agreement in place beforehand, the equity in a matrimonial home or a home occupied by common law partners is split 50/50. That’s the way the law sees it, and there is serious repercussions here because a parent will gift money to their son or daughter and are very upset when they find out that that gift is now being split between their son or daughter and their estranged partner.

Put it in writing

Chris: [00:03:51] So good fences make good neighbors. And then lastly, the fourth tip is to put it in writing. So verbal is fine to establish it up front, but you always want to put this in writing. It doesn’t have to be a very complicated document. You know, you see things like prenup and you think there’s some negative connotation around prenup, as if you’re anticipating that something bad is going to happen. But the prenup could be as simple as just dealing with a gift and what happens and get all parties to agree in writing. And then hopefully it never needs to be pulled up again.

Chris: [00:04:30] My name is Chris Molder. I’m a Toronto mortgage broker and I have a stated goal of improving financial literacy. So if you enjoyed this video or got some value out of it, give me a thumbs up, give me a like, and please follow me on on social media. You can find me at tridacmortgages.com. If you Google that, you’ll find me all over. Bye for now, thank you so much. And if you have any questions about any topic relating to mortgages, let me know and I’ll cover it in the next video.

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Christopher Molder

Mortgage Broker

Christopher is a mortgage broker based in Toronto, Canada. And a son of a broker too. He’s a second generation mortgage broker. Following in his father’s steps he joined the family mortgage business straight out of university.