What you need to know before helping your child with a home down payment

OTTAWA – With the benchmark prices for a home in Toronto or Vancouver at over a million dollars, the prospect of saving enough for a down payment to enter the real estate market can be a daunting task for first-time buyers.
That’s why a growing number of parents look to help by gifting cash.
Natalie Gill, a senior financial planner at Royal Bank, says she’s always seen parents and grandparents help in different ways.
“But it’s just that I feel now people are wanting to help more and they’re more aware of it,” said Gill, who has 25-years of experience as a financial planner.
Home prices soared in 2021 when mortgage rates were low and while prices eased when interest rates soared, they remain significantly higher than where they were before the pandemic struck.
According to the Canadian Real Estate Association the average price of a home sold in September was $669,630, down from its peak of $815,723 in February 2022, but still up from $517,731 in December 2019.
A report earlier this year by CIBC found that homebuyers relying on money from their parents in order to buy a home is becoming the norm in Canada.
The CIBC report in June suggested 31 per cent of first-time homebuyers received help from family members, up from 20 per cent in 2015, while the average gift was $115,000, up 73 per cent from 2019 levels.
Gifting money helps homebuyers in a number of ways.
A gift can help reduce the size of a mortgage needed, saving interest costs. It may also reduce or even eliminate the mortgage loan insurance required which could also save borrowers money.
Mortgage default insurance is required if you are buying a home in Canada with a down payment of less than 20 per cent. The premiums are calculated based on the size of down payment and are smaller the closer you are to the 20 per cent threshold.
Joe Reid, vice-president of wealth management and impact investing at Vancity, says it is important for families to have detailed conversations about money.
“While mom and dad may be helping out with the down payment, the kids still have to be approved,” he said.
Reid says you don’t want to be in a situation where the buyer has the down payment, but end up with a home that they can’t ultimately afford.
He says it’s important to work with a financial adviser to ensure any gift works for both the parents and the children and is affordable for all involved.
Gifting money can involve more than giving the cash. Lenders may ask for a gift letter that confirms the money is not a loan that needs to be repaid. If the gifter needs to sell investments to make the contribution, there may be tax consequences if those assets have appreciated and realize a capital gain when they are sold.
Gill also recommends if you are gifting a large amount to buy a property to get a legal agreement to protect those assets for your child in the case of a marital or relationship breakdown.
Fairness and family harmony are also important considerations if those making the gift have more than one child and should be part of estate planning.
“If you’re gifting to one, what are the intentions for the others?” Gill said.
Reid says gifters also need to take into account the different circumstances between children especially if one earns a lot more money than another.
“If you’re supporting one child more during your life, maybe there’s an opportunity to equalize that upon your passing,” he said.
Gill stressed parents don’t need to be able to cut a cheque for $100,000 in a single shot to help.
Parents can help their children top up contributions to their first home savings accounts (FHSA) or tax-free savings accounts (TFSA) to help grow their savings to buy a first home.
“So you can do it slowly and both you and the child can contribute,” she said.
“Like we say with anything, you start with a small amount and you contribute on a regular basis.”
This report by The Canadian Press was first published Oct. 31, 2024.