The Reality of Down Payments for Millennials and Gen Z: Why Gifted Funds Are Becoming the Norm

In today’s housing market, the dream of homeownership can feel more like a distant reality, especially for Millennials and Gen Z. With soaring property prices and the cost of living steadily climbing, saving for a down payment is one of the biggest hurdles.

The Rise of Gifted Down Payments

It’s no secret that more and more young homebuyers are turning to their families for financial assistance. According to recent studies, nearly half of all first-time homebuyers are relying on gifted funds for their down payment. But what’s driving this trend?

Why the Shift?

1. Skyrocketing Home Prices: The cost of homes in Ontario, particularly in urban areas like Toronto, has outpaced wage growth. This makes it nearly impossible for young people to save the traditional 20% down payment without help.
2. Stagnant Wages: While the cost of living continues to rise, wages for Millennials and Gen Z have not kept pace. This wage stagnation makes it difficult to accumulate savings at a rate that matches the increasing costs of homeownership.
3. Student Debt: Many young Canadians are also grappling with significant student loan debt. This financial burden further delays their ability to save for a down payment.

The Emotional Impact

Turning to parents or other family members for help can be a double-edged sword. On the one hand, it can be a relief to receive the support needed to achieve homeownership. On the other hand, it can also lead to feelings of guilt or dependency. It’s important to approach these conversations with care, ensuring that all parties feel comfortable with the arrangement.

Navigating the Mortgage Process with Gifted Funds

If you’re considering using a gifted down payment, there are a few things to keep in mind:

1. Documentation: Mortgage lenders require a gift letter from the person providing the funds, stating that the money is a gift and not a loan that needs to be repaid.
2. Eligibility: Not all lenders accept gifted down payments, and some may have specific requirements about who the gift can come from (usually immediate family).
3. Impact on Mortgage Terms: While gifted funds can make it easier to qualify for a mortgage, it’s important to understand how they might affect your loan terms and the overall affordability of your mortgage.

As the financial landscape continues to evolve, it’s likely that the trend of gifted down payments will only grow. For Millennials and Gen Z, understanding the realities and options available is crucial in navigating the path to homeownership.

If you’re in the process of buying a home and considering a gifted down payment, I’m here to help guide you through the process and ensure everything is handled smoothly.

On the other hand, if you do not require a gifted down payment. Here are some other options of how you can save for your own down payment. 

Alternative Sources for a Down Payment

Personal Savings:

• High-Interest Savings Accounts: Setting aside money in a high-interest savings account or a Tax-Free Savings Account (TFSA) can help grow savings more quickly.
• Automatic Savings Plans: Many financial institutions offer automatic savings plans that can help consistently build up a down payment over time.

First-Time Home Buyer Incentives:

• Home Buyers' Plan (HBP): In Canada, first-time homebuyers can withdraw up to $35,000 from their RRSPs (Registered Retirement Savings Plans) tax-free to use as a down payment. Couples can withdraw up to $70,000 combined.

Side Hustles and Freelancing:

• Gig Economy Jobs: Taking on part-time work in the gig economy, such as freelancing, ride-sharing, or food delivery, can supplement income and build a down payment fund more quickly.
• Selling Unused Items: Online platforms like eBay or Facebook Marketplace make it easier to sell unused items and contribute the proceeds to a down payment.

Inheritance:

• For those fortunate enough to receive an inheritance, this can be a significant boost to their down payment fund. However, it’s important to plan how the funds will be used to ensure they align with long-term financial goals.

Investments:

• Low-Risk Investments: Short-term, low-risk investments such as Guaranteed Investment Certificates (GICs) or bonds can provide modest returns while preserving capital for a future down payment.
• Stocks and Mutual Funds: For those with a longer time horizon, investing in stocks or mutual funds may offer higher returns, though with more risk. It’s crucial to assess risk tolerance and time frame before investing.