As most of you know, real estate transactions have slowed down since the increase in interest rates and the higher levels inventory. The price of goods and services is soaring and people are struggling to get by, let alone come up with a down payment to purchase a new home. My name is Danielle Demerino and I’m a Toronto Real Estate Agent. One of my passions is to help educate my buyers and sellers on how to build wealth through real estate. I recently worked with a wonderful young couple who came to me with questions regarding purchasing a family property and I wanted to make sure all parties involved were fully educated on the perks of doing so!
Times are tough right now financially for so many. Coming up with your down payment can come from a variety of sources; personal savings, stocks, RRSPs, divorce settlement, or even as a gift! What many Canadians don’t know is that a down payment can also be given as a gift of equity when the buyer is purchasing a home from a close relative. Let’s take a closer look at what the gift of home equity is.
What is Home Equity?
First off, what is home equity exactly? If you were to take the value of your home today and deduct anything that is owed on the property, you are left with the amount of equity you have in your property. In most cases, homeowners pay down their mortgage over time and property value slowly increases which increases an owner’s home equity. This means, when you purchase a property, the first step towards building equity in your home is the down payment towards the purchase price.
Can I Leverage My Home Equity?
Purchasing real estate has helped so many people build wealth. We have seen real estate prices boom over the past five years. Even with the dip in recent months, the average home in the GTA has increased by over $300,000 ($780,104 in October 2017 compared to $1,089,428 in October 2022). What some people don’t know is that you can borrow money against the equity you have built in your home while you are still residing in that home. Perhaps you want to renovate your home, consolidate your debt, buy an investment property, or some other big purchase.
There are many different ways to take out money against your home equity. The major ones are re-financing cash-out, a home equity line of credit, and a home equity loan. Equity can also be given in the form of a gift! If a family member chooses to sell their home to another family member, they can gift them cash in the form of equity!
Let’s say a child wants to buy their parents’ home. The parents may choose to gift their child some of the equity they have built. The gifted equity can be used as part of the down payment for the purchaser (in most cases that is). While there are no written laws about this, most lenders limit the gift of equity to close family members.
How Does the Gift of Equity Work?
The concept of gifting equity can be a bit confusing, so let’s use some cold hard numbers to explain it! Mary and Robert own a home worth $1,000,000 with a $500,000 mortgage. The couple decides to sell their home to their son and his wife who are struggling to come up with the down payment and make the decision to gift them $100,000 of equity which will serve as a 10% down payment.
When the purchase agreement is drawn up, the purchase amount will be $1,000,000 with a $100,000 gift of equity as a down payment. This means Mary and Robert will be accepting $900,000 for the sale of their home and receiving $400,000 after they pay off their outstanding mortgage of $500,000.
Mary and Robert’s son and daughter-in-law have had their down payment paid for and will only be responsible to pay for the closing costs such as lawyer’s fees, land transfer taxes, and any other adjustments.
There you have it, the gift of equity can be another form of a down payment! It’s important to note that this type of down payment must be approved by lenders. For more information, feel free to reach out to our expert mortgage broker Arlene Karram.