What is Gifted Equity?

As you may already know, the real estate market has seen a slowdown due to rising interest rates and increased inventory levels. Many individuals are struggling financially and finding it difficult to save for a down payment on a new home. As a Burlington Real Estate Agent, my goal is to assist my clients in learning how to build wealth through real estate. Recently, I had the opportunity to work with a couple who were interested in purchasing a property from a family member, and it inspired me to share information about the potential benefits of using gifted home equity as a down payment.

There are various ways to come up with a down payment, such as personal savings, stocks, RRSPs, divorce settlements, or even gifts. However, many Canadians are not aware that a down payment can also be given as a gift of equity when the buyer is purchasing a home from a close relative.

What is home equity?

Home equity refers to the value of a property after any outstanding mortgages have been subtracted. Over time, as homeowners pay down their mortgages and property values increase, the amount of equity in the property also increases. When purchasing a property, the down payment towards the purchase price is the first step in building equity in a home.

How can I leverage my home equity?

Real estate has proven to be a valuable tool in building wealth for many people. Despite recent market fluctuations, we have seen a significant increase in property values over the past five years, with the average home in the Greater Toronto Area (GTA) rising by over $300,000. However, many people are unaware that they can borrow money against the equity they have built in their home while still living in it. This can be useful for various purposes such as home renovations, debt consolidation, buying an investment property, or other big purchases.

There are several options to access the equity in your home. The most common methods include cash-out refinancing, a home equity line of credit (HELOC), and a home equity loan. Additionally, equity can also be gifted to a family member, particularly when a family member chooses to sell their home to another family member, in which case they can gift them cash in the form of equity.

For example, if a child wants to purchase their parents’ home, the parents may choose to gift some of the equity they have built in the property to their child. This gifted equity can be used as part of the down payment for the purchase. It’s important to note that while there are no specific laws governing this, most lenders typically limit the gift of equity to close family members.

The concept of the gift of equity

To better understand the concept of gifting equity, let’s use a numerical example. Imagine Joan and Bob own a home worth $1,000,000, with a $500,000 mortgage. They decide to sell the home to their son and his wife, who are having difficulty saving for a down payment. To help them out, Joan and Bob decide to gift them $100,000 of equity, which will serve as a 10% down payment for the purchase.

When the purchase agreement is created, the purchase price will be $1,000,000 with a $100,000 gift of equity included as a down payment. This means that Joan and Bob will be selling their home for $900,000 and will receive $400,000 after paying off their outstanding mortgage of $500,000.

In this scenario, Joan and Bob’s son and daughter-in-law have had their down payment covered by the gift of equity and will only be responsible for paying for closing costs such as legal fees, land transfer taxes, and any other expenses. The gift of equity serves as a viable alternative for a down payment, but it’s important to keep in mind that this type of down payment must be approved by the lender.

For more information, reach out!