Purchasing a home can be an overwhelming process; it is especially daunting today, given the price range of homes in most of Canada’s major cities. Even couples with dual income and high earners are struggling, especially when these prices are accompanied by rising interest rates! Perhaps the demographic most challenged by the prospect of buying their first home, is our young, newly employed, newly graduated children.

Many of these first-time buyers have help from family members. This assistance can take many forms, from shared purchases to gifting the family home when downsizing. One of the most common ways to help a family member is to provide all or part of the down payment. Is this ever a good idea? Though we are not lawyers and highly recommend seeking legal advice, this post will give you an overview of options and what the implications could be.

The Biggest Obstacle to Ownership

As of September 2023, the average price for a residential home in Ottawa, based on figures provided by the Ottawa Real Estate Board, was $725,000. Since the value is under $1 million, the down payment is 5% on the first $500,000, and 10% on the remaining $225,000. 

This means a home buyer would need a minimum of $47,500 upfront to qualify for a mortgage. Fortunately, in Ottawa, the amount isn’t $1 million or more as it might be in some jurisdictions. If it were, the minimum down payment jumps to 20%, which works out to $200,000 or more!

Alternatively, a first-time buyer might look at a condo, which averages out to a purchase price of $435,000 in Ottawa. Again, since the purchase price is less than $500,000, the down payment is just 5% or $21,750. Still, many young buyers will struggle to come up with this amount, which is why purchasing that “first-ever” home is simply an insurmountable obstacle. 

By gifting the down payment, you can make the impossible, possible, for a young family member. And if you can increase the down payment to 20%, you eliminate the need for mortgage insurance, which makes breaking into the market even more affordable for someone starting out. 

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Looking for more creative tips to enter the Ottawa real estate market? The resources below will give you some ideas:

• Strategies to Help First-Time Buyers Enter the Real Estate Market
• Can You Buy a Home with a Co-Signer?
• Why Is Buying an Investment Property Different From Buying a Home to Live In?

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Can They Take It From Here?

Gifting a down payment offers an undeniable advantage and an incredibly generous gesture for your child. But is it enough, given the high prices of housing plus the interest rate on that first mortgage and running the home day-to-day? Owning a house is a big commitment that requires a level of financial independence, even with support from a third party. 

Before deciding to help a family member purchase a house, it’s essential to know that they will be able to keep up with the monthly payments and take care of the property going forward. In addition, they need to factor in property taxes, utility costs and be prepared for any unexpected maintenance that may come up. 

Title or No Title?

Should you insist that your name be on the title when financially contributing to a home purchase? It depends on your financial situation and how well you know the person you are helping. If the down payment is truly a gift, you probably leave your name off the deed. 

That said, taking a portion of the ownership can help protect your financial interests. With your name on the title, you can likely recoup some of your investment if your family member ends up not being able to hold the property for any reason. 

On the other hand, having your name on the title also means you share in the responsibility of home ownership, including the potential for owing your share of the property taxes and insurance. If you currently own another property, there could also be capital gains tax if your family member decides to sell later.

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Why consider Ottawa when buying your first home? Discover just a few reasons in the posts below:

• Neighbourhood Spotlight: Little Italy
• The Glebe – Ottawa’s Historic On Foot Neighbourhood
• Is Ottawa Boring? No, and Here’s Why!

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What Are the Rules of Gifting?

There is a difference between gifting money and lending money. The idea of giving money to a family member as a gift is not that complicated, but when it comes to lending money, lenders will want to protect their financial interests by ensuring the home buyer has the financial ability to continue paying off the loan. Keep in mind, that lending the money for a down payment won’t help someone qualify for a mortgage, as the bank will see this as just another liability. As such, many lenders will require a gift letter that verifies that the funds you are providing are truly a gift. In addition, banks or mortgage lenders will want to see and consider it an advantage if the down payment money is coming from an immediate family member, such as a parent, grandparent, or sibling.

If you are required to write a gift letter, be sure to include the following:

• The name of the buyer and your relationship with them
• Your name, address, and phone number
• The amount that you are gifting
• Verification that this is a gift that does not need to be repaid
• The address of the purchased house

Should you ever try to trick the bank by writing a gift letter when you secretly want the money paid back at a later date? As you can imagine, this is not recommended. It’s not just deceitful but is actually illegal and can be a form of mortgage fraud. To protect everyone’s interest, it’s best to keep it simple. A gift is a gift, nothing more!

At the Chell Team, we strive to make the complicated simple! If you need advice when buying or helping someone buy a house, we’d love to help. Reach out today at 613.829.7484 or email mail@chellteam.com for more information.