Family assistance increasingly common for first-time buyers
They’ve become an increasingly prominent part of Canada’s mortgage market amid a spike in housing unaffordability in recent years – but what should mortgage brokers keep in mind about their clients using gifted downpayments?
Lenders will usually require a downpayment gift letter – confirming that the donated amount is valid and from a recognized source, with some lenders also having tight restrictions on who can offer a gifted amount. Others may not recognize gifts from more distant relatives.
Meanwhile, to guarantee full transparency about where the money came from, lenders also normally require proof that the funds have been deposited into the applicant’s bank account, and often clear transparency on where the payment is coming from.
A careful conversation is required between brokers and their clients on using gifted downpayments to fund a mortgage – and whether they’ll be able to satisfy the lender’s expectations. The good news for brokers is that many borrowers are already attuned to the reality that they won’t be able to go it alone because of the steep affordability challenges at play in the current market, according to a prominent Ottawa-based mortgage broker.
Andrew Thake (pictured top) of Smart Debt Mortgages told Canadian Mortgage Professional that a growing number of clients realize they will need some form of assistance and have already done their research on what that might entail. “Usually, I had to be the bearer of the news, ‘You need a cosigner,’” he said. “But a lot of [clients] are already knowing they need a cosigner – so family support has been a huge thing.”
Where are gifted downpayments most prominent?
it’s not just the country’s two priciest cities which are seeing gifted downpayments surge. A recent Canadian Imperial Bank of Commerce (CIBC) update to its seminal 2021 study on gifted downpayments across the country revealed that while the share of first-time buyers receiving financial help from family members has remained somewhat flat in recent years, gift amounts have risen “sharply” even as home prices have dipped.
Toronto and Vancouver remain by far the most expensive housing markets in Canada, with Ratehub’s latest analysis on housing affordability showing household income well north of $200,000 was required to purchase the average property there in June.
But while first-time buyers elsewhere may face a less daunting challenge to put together a downpayment, that’s not to say those outside the country’s most expensive hubs are always able to go it alone.
In Ottawa, where the income required to purchase an average home is about $100,000 lower than in Vancouver and around $85,000 below Toronto, many new buyers are still relying on assistance from a family member, according to Thake.
He said that even though the price point for first-time buyers was lower in Ottawa than those two metropoles, some were counting on other sources to get their purchase over the line. “A lot of people seem to be getting support from family,” he said.
“Family gifts are definitely a big thing. I work with a lot of first-time homebuyers and they’re already coming to me saying, ‘Hey, if it doesn’t work out with just me, my parents will cosign,’ or, ‘They’re willing to give me some money.’”
When will conditions improve on the affordability front for buyers?
Affordability across major Canadian markets improved slightly in June, according to Ratehub – in part as a result of the Bank of Canada’s decision to cut interest rates by 25 basis points in its announcement at the beginning of the month.
Still, that’s had at best a marginal impact on buyers’ ability to put together a downpayment. In Ottawa, the income required to afford a home inched lower by just $850 between May and June, while in Vancouver that figure was $1,250 and $1,560 in Toronto.
All eyes are on the Bank’s next decision, scheduled for Wednesday (July 24) to see whether a further cut is in the offing. Until then, its latest cut is “enough to make people give a bit of a sigh of relief or maybe tune into the idea of buying more,” Thake said. “But the floodgates haven’t opened or anything like that.
Business and consumer sentiment suggests Canadian inflation will likely remain subdued, paving the way for potential interest rate cuts by the Bank of Canada. https://t.co/O7Tq2FMUoj#economicoutlook
— Canadian Mortgage Professional Magazine (@CMPmagazine) July 17, 2024
“If you were climbing Everest, we’ve hit the peak and now we’re starting to come back down and hopefully the walk down is easier than the climb up. So with that, I think that it’s sparking interest. It’s opening up some conversation.”
Top of mind for Thake since that June cut has been an education-driven approach centred on making sure clients are fully aware of the implications of the rate drop and what it means for them.
Still, hopes are high that further moves to bring rates lower will spur an influx of new buyers to the market. “I think the spark will come with the next Bank of Canada rate drop,” he said. “That’s going to light the fire – and then just more drops after that will be putting more fuel on top.”
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