Written by Jim Adair
About 10 years ago, a study suggested that baby boomers were about to inherit a trillion dollars. Many boomers have already received their inheritance and it’s one reason why the country’s real estate boom has lasted so long.
But a new report by Benjamin Tal at CIBC Economics, based on a survey by Angus Reid Forum, says that during the next decade there is still about $750 billion to be transferred to Canadians aged 50 to 75 in the largest intergenerational wealth transfer in Canadian history.
Tal says that guessing how much money will be inherited is tricky.
The survey found that just over half of Canadians aged 50-75 have already received an inheritance, which averaged $180,000. The largest average inheritance was in British Columbia, “no doubt due to the elevated value of real estate in the province,” followed by Quebec and Ontario, says Tal. For the rest of the country, the average was less than $100,000.
“Based on that information, and Statistics Canada’s demographic projections, alongside conservative assumptions regarding wealth appreciation, we estimate that the coming decade will see close to $750 billion exchanging hands,” says Tal. “That is almost 50 per cent more than the estimated amount of inheritance received over the past decade.”
The study shows that much of that money will go to people who are already enjoying higher income brackets. The average inheritance for those who earn more than $100,000 a year is almost three times higher than among low-income Canadians, says Tal. “Simply put, if wealth is not evenly spread across society, then inheritance will repeat the pattern and exacerbate inequality.”
Tal says the impact of the huge money transfer on the real estate market will be gradual. In Toronto and Vancouver, where there is a shortage of low-rise homes for sale because it’s tough for move-up buyers to find a home they can afford, the transfer may help increase the supply of homes for sale, he says.
But many homeowners are choosing to stay in their current homes and renovate them, rather than face the wild real estate markets in the Lower Mainland in B.C. and Southern Ontario. Tal says the home renovation market will also benefit from the inheritances.
Previous surveys have shown that some baby boomers who were expecting a large inheritance have received less than anticipated. A BMO Wealth Institute report in 2013 said that “both seniors and boomers indicated that they are planning on leaving an inheritance to someone other than their spouse/partner or child.
Moreover, seniors are more likely than boomers to plan on leaving an inheritance to a grandchild or to a charitable organization. Ultimately, this may reduce the size of the inheritance that will be distributed to each beneficiary.”
With rising house prices, Tal says more people may start giving away their money before they die, via inter-vivos gifts, “a factor that might have a positive impact on homeownership rates among younger Canadians,” says Tal.
Vancouver mortgage broker Atrina Kouroshnia says getting a mortgage with help from friends or family has a few wrinkles that homebuyers need to understand.
“Mortgage lenders typically won’t allow down payment gifts from friends or bosses or other non-relatives. Sorry,” writes Kouroshnia in her blog. “Your lender may require that the person gifting the money provide a gift letter outlining the amount of the gift, the recipient, the giver’s relationship and the fact that the gift is not subject to repayment terms. Sometimes parents or relatives lend money for a down payment rather than gifting it, but lenders frown on this because it increases the borrower’s debt-to-income ratio.”
She says some lenders also require the gift-giver to share their banking history. “If your parents are wary of sharing their financial information with you, they may be able to communicate directly with your lender rather than using you as a middleman,” Kouroshnia writes.
She also says, “If a couple is buying a home jointly, the gift-giver may want to specify in the letter that the gift is intended for their grandchild, child or niece,” she says. “Otherwise, if the couple divorces, the down payment gift may be presumed to be for the benefit of both parties and split evenly between them.”
If the buyer has an inheritance, “unless you are able or prepared to plunk down a very large down payment, you will have the same mortgage qualifications as everyone else. Lenders always want to see some sort of income on the books,” says Kouroshnia. “The hard reality is that unless your inheritance can cover most of the cost of the house, you will need a co-signer in order to obtain a mortgage if your own income does not qualify for it.”