Over the next several weeks, with home prices at such a high level, I will be outlining some possible options for parents to assist their children in stepping into home ownership. Here is the first of five columns.
The average sale price of a home in the Greater Toronto Area was $1,126,604 at the end of 2023—and that’s following ten Bank of Canada overnight lending rate hikes going back to March 2022. Even in a down market—the benchmark price of a home in the region was $1,133,276 at the end of September—the price of a GTA home stubbornly remains seven figures strong.
Moreover, in light of the population growth trendline, that figure isn’t likely to decrease. Canada is slated to welcome 485,000 immigrants in 2024 before a minimum of 500,000 in 2025, but these figures exclude non-resident permit workers. In short, demand for housing is slated to grow, not decrease.
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But housing prices aren’t coming down, and with the current elevated mortgage rates, financial support courtesy of the so-called bank of mom and dad will remain a necessity going forward.
Financial gifting has been entrenched in the GTA’s housing market for quite some time. As far back as 2015, the bank of mom and dad was a significant source of financing in the pre-construction and resale residential submarkets, and as the home prices have surged, so too have financial gifts.
According to an analysis by CIBC, financial gifting in real estate purchases rose from 20 per cent in 2015 to 28 per cent six years later. That translated to an average of roughly $52,000 nine years ago, and $82,000 in 2021, despite the share of financial gift recipients remaining flat.
The report also noted that, during the Bank of Canada’s quantitative easing regime—which plunged its overnight lending rate to 25 basis points through the COVID-19 pandemic—the growth of financial gifting moderated.
However, in March 2022, the central bank changed course and introduced quantitative tightening monetary policy, resulting in 10 interest rate hikes that’s brought the policy rate to five per cent. This only increased the need for parental assistance in a home purchase.
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It’s crucial to get a letter from a financial institution indicating that money is being gifted, and why. Specifically, the letter should state that the money is to be used for the down payment on a new home. The letter should also include the recipient’s name, as well as other salient details about their situation, and your relationship to them.
The letter should also make clear, in no uncertain terms, that there is no expectation for the gifted money to be repaid.
It is also noteworthy that gifting as close to the full 20 per cent down payment will result in lower monthly mortgage payments mortgage insurance fees, which is imperative to paying down the principal as quickly as possible. It will also open up more home equity, which can be leveraged to grow wealth through the acquisition of other assets, be they a home or even stocks.
Mirella Sarrapochiello is Vice President, Sales and Marketing, for Dunpar Homes, a company that’s been building homes and communities across the GTA for more than 40 years specializing in luxury townhomes. Contact her with your questions at: info@dunpar.ca. To see all 5 columns visit dunparhomes.com.
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