The down payment – where is yours coming from?

With recent Altus Group statistics for the Greater Toronto Area showing the benchmark price of a new single-family home sitting at $1.77 million, and of a new condominium at $1.15 million, you have to wonder how so many people are affording down payments of up to 20 per cent.

Nowadays, down payments are as much as homes used to cost a few decades ago. Of course, many purchasers still use traditional methods, such as saving over long periods of time or using the equity they’ve earned on an existing house to buy a new one. Some people are co-purchasing to make the deposit and mortgage more affordable for those involved. First-time buyers can also take advantage of government programs that help, such as Canada’s Home Buyers’ Plan, which enables them to draw up to $35,000 from their RRSPs toward their purchase.

Family assistance

Another avenue for buyers is to receive financial help in the form of gifts from their parents, and that practice is trending today in more ways than one. In October 2021, CIBC issued an Economics in Focus report that said about 30 per cent of first-time buyers (up 10 per cent from 2015) and slightly less than nine per cent of existing homeowners received financial help from their families during the previous year. Across Canada, the average amount first-time buyers received was $82,000 (up from $52,000 in 2015), and the average gift to move-up buyers reached $128,000 in September 2021.

Of course, those are averages. In fact, during the first three quarters of 2021, the average gift to first-time buyers in Toronto was more than $130,000, and to move-up buyers nearly $200,000. In Vancouver, those figures were $180,000 and $340,000, respectively.

According to Benjamin Tal, CIBC’s deputy chief economist, overall, this financial gifting amounted to a whopping $10 billion in Canada, representing 10 per cent of total down payments. At least two-thirds of first-time buyers who received help reported that it was the primary source of their down payments.

Mortgage co-signers

So, how are parents finding all this money to help their kids? Surprisingly, only 5.5 per cent of the helping parents are going into debt to do so. A substantial percentage of them are drawing from their savings for those gifts – savings that grew quite a bit during the pandemic, when Canadians weren’t traveling and using up disposable income as usual. There are billions of dollars that would normally be in circulation but aren’t because of people staying home and curbing spending. Another approach some parents are taking is to release money that would eventually be considered part of their children’s inheritance. The number of parents co-signing for mortgages has increased as well.

Combined with ongoing low mortgage interest rates, this trend is making it financially feasible for more Canadians to get into and move up in the real estate market. Remember that many gifting parents paid double-digit mortgage rates during the late 1980s and early 1990s, so they see an optimum window of opportunity for their kids to tap into our current low rates. It will be interesting to see how this trend plays out in the long run, but for now, it’s a lifeline for would-be buyers.