Mortgage co-signers vs gifted down payments: Knowing the difference

Entering the housing market in Canada has gotten progressively harder for many potential buyers. The costs of properties, interest rates, and down payments have all been large obstacles. These factors have contributed to the rise in gifted down payments and mortgage co-signers popping up on mortgage applications. Canadians who are fortunate enough to have access to these boosts are taking advantage of them today more than ever. What’s the difference between these two items, and is one better than the other? Here’s what you need to know. 

Gifted down payments

For many Canadians, the hardest part of breaking into the housing market is saving up that huge down payment. As you might know, a down payment must be at least five per cent of a home’s purchase price. However, down payment requirements increase with the price of the property, so you could be looking at a minimum payment of 10 or even 20 per cent. In any case, your down payment is a major upfront cost and housing prices have made it difficult to save up. This is where gifted down payments come in. A gifted down payment is just what it sounds like. Someone who is not the home buyer contributes part or all of the necessary down payment on behalf of the buyer. This usually comes from a parent who is helping their child enter the market. With the down payment cleared, the buyer is able to complete their home purchase much more easily. They have more money to use for their future mortgage payments, they can contribute a higher down payment, or they may also be able to increase their budget. 

Mortgage co-signers 

The other major source of assistance comes in the form of a mortgage co-signer. This person actually appears on the purchase contract as a responsible party. They are on the hook for mortgage payments if the primary owner cannot make them. Unlike a person who gifts a down payment, a co-signer is held accountable for the mortgage itself. Home buyers also often use parents as co-signers to act as backup and financial reassurance for a lender. If the buyer’s finances aren’t the strongest on their own, a co-signer with a strong record can boost the buyer’s application. 

Is one better than the other?

It’s hard to say that one of these services is objectively “better” over the other, because so much depends on individual circumstances. For lenders, a mortgage co-signer is usually the preference over a gifted down payment. This is because it means there will be another responsible party on the mortgage contract that the lender can turn to for payment if necessary. Co-signers are more involved and more responsible for the mortgage than someone who simply provides the down payment. A person who gifts a down payment does not have any obligations to the lender. 

Important points to know

There are some guidelines that can help you decide which of these options may be best for you. For example, a gifted down payment is not a loan, and cannot be treated as one. This means the person giving the down payment will not receive any kind of payback, so they are truly gifting this money. On the plus side, these donors do not need to answer to the mortgage lender once the application is approved. It’s important to note that gifted down payments must come from an immediate family member, such as a parent, grandparent, or sibling. 

On the other hand, a mortgage co-signer can be anyone who is financially fit and agrees to support the buyer in such a way. This option has its own pros and cons. The obvious drawback is the possibility of having to make mortgage payments on a home you do not own or live in. However, someone who co-signs for a responsible homeowner may never have to contribute a dollar. As long as the bills are paid, the co-signer can just sit back and relax. 

If you are thinking about giving, or receiving, a gifted down payment or mortgage co-signer, make sure you know the risks and benefits. As a buyer, this kind of financial assistance can be life-changing, so make sure you act responsibly with it! As a potential donor, you must ensure you are financially stable enough to afford these positions. Think carefully before you make such an offer!

If you have any questions about your mortgage, get in touch!