First-Time buyers needing financial help from parents and grandparents is increasing.
With home prices exceeding a million dollars, many first-time home buyers in cities like Vancouver, Surrey, Langley, and Burnaby are receiving financial help from family. According to a recent study by CIBC, 31% of first-time buyers received money from family for their downpayment, a significant increase from 20% in 2015. A downpayment is a powerful way to support your child, but it’s important to plan carefully. Here’s what parents should consider before making this meaningful contribution.
Considerations to providing money and “Gifting” a Downpayment
1. Consult a Financial Advisor
A financial advisor can help ensure that the gift won’t strain your finances and fits with your long-term goals. Consulting a professional helps make sure your support doesn’t strain your own finances or delay your retirement plans.
2. Know About Gift Letters
Most lenders require a gift letter confirming that the money isn’t a loan. This document is essential for mortgage approval and helps avoid misunderstandings with lenders. What does a gift letter entail? Let me help explain the mortgage rules around gift letters!
3. Consider Tax Implications
In Canada, there are no tax implications for either party unless, If you’re selling assets to provide the money gift, capital gains tax may apply. Speak with your advisor to find the most tax-efficient way to help.
4. Protect the Gift with a Legal Agreement
A legal agreement can protect the gift of money in case of marital changes. This step ensures your child retains the benefit of the gift in case of separation or divorce.
5. Keep Family Fairness in Mind
If you have multiple children, consider how this money gift fits within your family’s overall financial plan. As fairness and family harmony are essential when planning financial support.
6. You Don’t Have to Gift It All at Once
Parents can contribute gradually to their child’s First Home Savings Account (FHSA) or Tax-Free Savings Account (TFSA) to help build their savings over time, rather than providing a lump sum gift payment.
7. Confirm Your Child’s Financial Readiness
While helping with the downpayment is valuable, make sure your child is prepared for other costs of homeownership. Mortgage payments, property taxes, and maintenance can add up, so it’s essential they’re financially ready.
FAQ
Q: Are there tax implications for downpayment gifts?
A: Gifts to family are generally not taxed in Canada, but selling investments to fund a downpayment may incur capital gains tax. Speak to a financial advisor first!
Q: Does a larger down payment reduce mortgage costs?
A: Yes, it can lower mortgage payments and avoid mortgage default insurance if the downpayment reaches 20%. Download my mortgage planner calculator to help calculate what those mortgage payments will be.
Q: Should I document the gift?
A: Yes, particularly for giving a large sum of money as a downpayment gift. A legal agreement can protect the gifted amount if your child goes through a marital separation, ensuring the money remains theirs.
Start Planning Your Family’s Financial Future
Giving money to help your child with a downpayment is a big step. By consulting advisors, planning for tax and legal implications, and balancing family dynamics, you can support them confidently. Contact a Mortgage Broker in Vancouver, BC and the lower mainland, Greg Horvath owner of First Class Mortgages Services owned and operated out of South Surrey BC, for all your mortgage questions!
