Over the last couple of years, various surveys have revealed the same thing: prospective homeowners are concerned that they will be unable to buy a home because they cannot afford the down payment. 

Indeed, with Canadian real estate prices way above their pre-pandemic highs, plus interest rates at their highest levels since the global financial crisis, it is getting harder for younger Canadians to dip their toes in the housing market. 

Under the federal government’s rules, Canadians are required to have a down payment that is between five and 20 per cent of the purchase price. Considering that a home’s average price is above $700,000, gathering a down payment is a hurdle that is quite challenging to overcome. 

For those who are fortunate enough, one way to gain a footing in the housing market is through a gifted down payment. But what does this entail exactly? 

Gifted Down Payments: A Primer

A gifted down payment is when a third-party source, typically a close family member, will provide the funds for the purpose of meeting the minimum down payment requirements to buy a residential property. But while this is easier said than done, it is still an advantage many Canadians dream about. 

Benefits of Gifted Down Payments

Of course, there are plenty of benefits to receiving a gifted down payment. 

The first is that these younger households can enter the Canadian real estate market much sooner than they previously expected, considering how expensive it can be for the average person. Ultimately, with gifted down payments, prospective homeowners can avoid the long saving process and start accumulating equity in their homes. 

Something else that might be lost in the discussion surrounding gifted down payments is that borrowers could receive better mortgage terms. Sizeable down payments typically result in lower loan-to-value ratios, meaning borrowers might be extended lower mortgage insurance premiums or better interest rates. In the end, recipients of gifted down payments will enjoy incredible savings over the life of the mortgage. 

Believe it or not, you can experience tax advantages with gifted down payments. They can be allocated to your Registered Retirement Savings Plan (RRSP) for three months to obtain the tax benefits. That said, you must ensure that you maintain enough contribution room in your RRSP to facilitate the gifted sum. 

A Couple of Reminders 

Now, there are a couple of aspects that you need to remember when using gifted down payments. 

First, it would be wise to disclose these funds to the mortgage lender when applying for a mortgage. Generally, banks will request a gift letter outlining a few things: 

• Amount of the gift. 
• Relationship between the giver and receiver. 
• A statement confirming that the money was a gift and not a loan. 

In addition, while a gifted down payment can reduce the strain of the home-buying process, you still need to determine if you can afford to purchase a residential property. 

Another thing that some prospective homeowners might need to realize is that the gift giver does not earn a stake in the unit. While this gift was integral to buying a detached house or condominium, it does not mean they are entitled to an ownership stake. To eliminate any possible confusion, be sure to consult with a real estate attorney to have this in writing. 

Gifted Down Payments Help

Yes, receiving a gifted down payment provides you with a distinct advantage that the rest of the country does not possess. At the same time, public opinion polling data have revealed that many first-time homebuyers nationwide have received financial assistance from parents or relatives to ensure they got into the housing market. 

With many homeowners massing astronomical amounts of capital during the pandemic-era housing boom, in addition to extra savings, this could be the new normal for the lucky few. 

When eager new homebuyers begin saving up for a home, it’s easy to fall into the trap of putting on the blinders and fixating on saving up towards one number in particular.

However, buyers can often forget to factor in the additional secondary and tertiary costs it takes to buy a home. For all buyers, new or recurring, these are critically important costs to know about.

So, whether you’re a first-time buyer or have set your sights on moving up, here’s a breakdown of some of the true costs you need to consider when buying a home.

The Deposit

The first expense you should plan for is the deposit. This is a percentage of the total cost of the home that gets paid to the seller or Seller’s agent brokerage right away to essentially “hold” the sale and show the seller you are committed to the purchase. Typically, a deposit is 5-10% of the total purchase price and is required to be paid within 24 hours of the offer.

The deposit also must be made in the form of a certified check, bank draft, wire transfer or Etransfer, which means a homebuyer will need fast access to funds when putting in offers. This money is typically paid to the Seller’s Realtor’s Brokerage company or sometimes to the seller’s lawyer to be held in trust until the home closes.

The higher your deposit, the more committed you may look to sellers and the more desirable your offer comes across. Once the deal is finalized, your deposit money can go towards closing costs or towards your down payment, which brings us to the next cost you need to plan for.

The Down Payment

A down payment is different from a deposit. The down payment is a lump sum payment that goes toward the final purchase of your home. In Canada, there are some rules around down payments. The minimum down payment you can pay is 5% for a home valued at $499,000 or less and 10% for homes valued at $500,000-$999,000. For homes over $1 million, buyers are required to pay at least 20%.

If possible, paying more than the minimum down payment amount is better because it means you will pay your mortgage off sooner, pay less interest, and build equity more quickly.

There’s nothing more fun than fantasizing about what your next home could look like. However, with the help of our Featured Listings page here, you don’t have to daydream quite as hard.

Your Mortgage And Interest Rates

Once your down payment has been accepted, you can deduct that amount from the final sales price of your new home. To account for the rest of the sales price, you’ll need to take out a mortgage.

Mortgages are essentially loans for homes. The total amount of your mortgage depends on a few factors, such as the cost of the home you’d like to buy, the amount of your down payment, what you qualify for based on your annual income, what your monthly expenses are, and your employment history.

Generally speaking, it’s either banks or private mortgage brokers who grant you a mortgage. Whoever you secure your mortgage from, you’ll have agreed on the total amount of your loan and the structure of how you’ll pay it back. In most cases, it’s in the form of a monthly payment to your lender, which will include an interest rate.

This means that if you’ve agreed to put down $2,000 per month towards your home, for example, this fee, plus whatever your mortgage interest rates are, will go to your lender.

What About Mortgage Insurance?

If you are unable to pay the minimum down payment for your purchase, you may still be able to get a mortgage, however, you will be required to purchase mortgage insurance

Mortgage insurance is an added cost that protects the lender since the lender is typically taking on more risk with a lower down payment.

Are you planning on becoming a first-time homebuyer? Ensure you’re well-informed about everything you need to know about your upcoming purchase by reading these related posts:

• 5 First-Time Home Buyer Mistakes To Avoid
• First-Time Home Buyer Grants in Ontario
• Our Top 8 First-Time Buyer FAQs

Land Transfer Tax

The province of Ontario requires homebuyers to pay them an additional fee called the Land Transfer Tax. Essentially, this reflects the provincial government’s cost of permitting you to transfer the title of property between their jurisdiction.

While each province has its own set of Land Transfer Tax rates, the amount you have to pay increases depending on the cost of your new home. The more expensive your new home, the higher the percentage of its value you have to pay in Land Transfer Tax.

In Ontario, the set of Land Transfer Tax rates ranges from 0.5% to up to 2.5% of your home’s value. However, if you’re buying a home in the Greater Toronto Area, the City of Toronto requires buyers to pay an additional municipal Land Transfer Tax alongside the provincial tax.

The good news for first-time homebuyers is that you may be eligible to have all or part of this one-time fee refunded. Eligibility for this refund requires buyers to qualify based on these criteria:

• The buyer must be a Canadian citizen or permanent resident of Canada
• The buyer must be older than 18 years
• The buyer must occupy the home within nine months of purchase
• The buyer cannot have previously owned a home anywhere in the world
• The buyer’s spouse cannot have owned a home while being your spouse

If that applies to you, then you can apply for a refund of the full amount of your Land Transfer Tax or up to a maximum of $4,000.

Lawyers’ Fees

In order for both the buying and selling parties to ensure they’re conducting a legitimate and viable transaction, it’s a real estate lawyers’ duty to review and approve all of the necessary paperwork and legal documents that are included in a transaction.

While both the buying and selling parties hire their own respective lawyers, both legal representatives work together to ensure the real estate transaction is completed smoothly and no contractual or legal details are overlooked.

As you might imagine, there are a lot of formalities and details that go into a real estate transaction, which is why it’s crucial you hire a dedicated real estate lawyer who has experience facilitating these types of deals. As with all lawyers, though, their services come with a fee, which you’ll need to factor into your overall budget as a homebuyer.

Whether you’ve already got an idea of who you’d like to hire or need help finding a legal representative, we work with a set of highly respected and experienced real estate-specific lawyers that we’re always prepared to recommend to our clients should they need it.

There are no ifs, ands, or buts about it — the safest way to buy a new home is through the help of a knowledgeable and experienced local Realtor®. Learn more about what we do, how we help, and how you can find the Realtor® that’s right for you here:

• How To Hire a Real Estate Agent As a Buyer
• Why You Should Work With a Realtor®
• 8 Steps to Finding the Right Real Estate Agent

Your Homeowners’ Insurance

Homeowners’ insurance is a form of property insurance that protects you, the homeowner, from any damages to you or your property once you own your new home. It’s also a requirement to get a mortgage.

In paying a monthly fee to a homeowners’ insurance provider, you are in essence paying for peace of mind. If any damages were to occur to you or your new home, your insurance provider would provide you with funds (up to a certain number) to pay for the cost of fixing the damages.

Although all insurance plans and providers are different, most homeowners’ insurance policies generally cover the costs of things like interior damage, exterior damage, the loss or damage of personal assets or possessions, and any personal injury that occurs on your property.

Interested in learning more about how we can help you make your upcoming home purchase the best buy of your life? Read all about our buying process and how we’ve helped buyers just like you find their dream homes the first time here:

• How We Help Buyers
• Our Buyers’ Guide