*This post was created in collaboration with Mortgage Maestro.
Given how expensive homes are in Canada these days, coming up with a down payment towards this purchase can be a tall order, especially for first-time home buyers. Fortunately for many buyers, parents (and grandparents) give money as a gift for a down payment to help with a home purchase. According to a recent report by CIBC, the average down payment gift as of 2021 is $82,000, up from $52,000 in 2015.
So, how do gifted down payments in Canada work?
Key Points
- A gifted down payment is a monetary gift you receive from a close family member that you can use towards the down payment on a home.
- Gifted down payments must truly be a gift; the donor must not expect it to be repaid.
- Your lender may require a gift letter when you apply for a mortgage to prove that the money is indeed a gift and not a loan.
What Is A Gift For Down Payment?
A gifted down payment is simply money that has been given to you as a gift, usually by a family member or friend. Since the money is a gift and not a loan, it is not charged interest and does not have to be repaid. Buyers can use this monetary gift towards a down payment, as long as there is a paper trail showing that it is not a loan and is coming from reliable sources.
There are certain rules for using gift money as a down payment. If you’re considering gifting a child with a down payment, or if your family has given you funds to purchase a home, there are several important things to keep in mind.
Rules On Gifts For Down Payment
Mortgages have many regulations, ranging from high-risk thresholds to insurance. Given this, it makes sense that there are some rules surrounding gifted down payments.
Who Can Offer Gift Money For A Mortgage?
Technically, anyone can send you money as a gift. However, many financial institutions demand that the funds come from the immediate family when you want to use the gift money as a down payment. There are several reasons for this, with the primary motive being that money is a true gift.
Why Must The Funds Be A True Gift And Not A Loan?
Lenders don’t want you to use gift money that requires repayment. Otherwise, it won’t be a true gift, and you would be in debt both for the mortgage and the down payment (making you a high-risk borrower). Debt-to-income ratios are a major factor when approving someone for a mortgage. So, if you have to repay the gift money, this would increase your debt-to-income ratio.
To ensure the gifted down payment is actually a gift, most lenders will require that you supply a gift letter as proof.
How Much Money Can Be Gifted As A Down Payment In Canada?
There is no limit on monetary gifts for a down payment in Canada. This means your parents could purchase the entire house and gift it to you. Plus, there is no tax applied to gifted funds.
That said, there are rules on minimum down payment amounts required to buy a home.
| Minimum Down Payment Rules In general, you’ll need to offer 5% to 20% of your home price as a down payment. The exact amount depends on the value of your home. More specifically: – 5% down payment is needed on the first $500,000 of the purchase price. – A minimum of 10% is required on the portion exceeding $500,000, up to $999,999. – A minimum of 20% is required on homes that cost $1 million and over. However, effective December 15, 2024, the home price cap for insured mortgages will increase to $1.5 million. |
Gift For Down Payment: What Is A Gift Letter?
A “gift letter” is an essential document when providing a gifted down payment for your mortgage. Most mortgage lenders will require the person giving you the monetary gift to fill out and sign the letter. This letter should be signed and notarized, with the name and contact information of the person giving you the money.
This document will confirm that there is no obligation for you to repay the funds. Moreover, it will include the amount of the gift and where the money was sourced from. Essentially, the letter shows that your money is a genuine gift, issued in good faith by a donor who has no expectation of monetary gain from the transaction.
Gift For Down Payment: What Are Proof Of Funds?
In addition to the gift letter, your lender may request a transfer receipt. This is to show that the money was moved directly to you from the donor. You can find this receipt on your bank statement.
Mortgage lenders also request proof that the donor sent the money. The bank records the transaction numbers to substantiate the source of the funds; that the money is a real gift, issued intentionally. It also shows the practical side of how much money you receive.
While issues are not common, you may encounter more in-depth requirements if the money is sourced from overseas. If you are receiving a gift from overseas, plan ahead and keep all correspondence and financial records to ensure that you can substantiate the source.
5 Tips On Gifts For Down Payments
Obtaining a mortgage takes organization and planning, even with a gifted down payment. To manage all the aspects of the gift, be sure that you know the five key tenets, as follows:
1. Make Sure The Donor Is An Immediate Family Member
Though the specific requirement varies based on the institution, most lenders require your gifted down payment to come from a parent, grandparent, or sibling. If the donor has a unique relationship with you, you’ll need to substantiate that proof.
For example, if an aunt, uncle, or godparent wishes to gift funds for your home purchase, you can supply an official baptismal certificate or a notarized letter to prove the relationship. However, the bank has the right to reject it at their discretion.
2. Consider Self-Employed Rules
If you’re self-employed, you may need to make a larger down payment, as much as 20% or more. As a self-employed person, you’ll need to put at least 5% down on your own. The rest of the down payment money can come from a monetary gift.
So, while you can use gifted funds for most of your down payment, you’ll need to come up with some money yourself, so be sure to plan ahead.
3. Consider The 90-Day Deposit Money Period
Lenders prefer that the gifted funds be deposited into your bank account at least 90 days before you apply. This ensures that the money has been in your account for a sufficient amount of time, showing that it’s not from a loan that could affect your ability to pay the mortgage.
That said, the specifics of such requirements vary among lenders, so it’s important to verify your lender’s policies when it comes to gifted money for down payments.
4. Include Details In Your Gift Letter
Your lender will want to see specific information in your gift letter, such as:
- The amount of money being gifted
- Home price
- Personal information of the donor
- Relationship between you and the donor
- Source of the funds
- A statement affirming that the money is indeed a gift that is not to be repaid
5. One Lump Sum Deposit Is Ideal
If your family member agrees to give you money for a down payment, ask that the funds be provided in one lump sum. Making multiple deposits can make it more difficult to provide a paper trail, and will make it harder for your lender to track where the money came from.
Where Can You Get A Mortgage If You Don’t Have A Gift For Down Payment?
While some Canadians are lucky enough to have parents (or another close person) in their lives to offer gift money as a down payment, not everyone does. If you haven’t received a gifted down payment, you may wonder how it’ll affect your chances of getting a mortgage.
If you’re not sure you can qualify for a mortgage without a gifted down payment, try applying with a mortgage broker such as Mortgage Maestro. They can help find you the best mortgage solution based on your finances. They work with dozens of different lenders to help borrowers find the best rates.
Other Ways To Get A Down Payment
Gifts aren’t the only way that family members can assist in the home-buying process. For starters, the money doesn’t have to be in the form of cash. Parents have other options to assist if the value of their assets isn’t liquid. These include:
Second Mortgages/Home Equity Loan
If the parent or other donor is a homeowner and has significant equity in their home, they may be willing to use it as collateral for a second mortgage or home equity line of credit (HELOC). After this, they can transfer the funds as a gift.
The only caveat is that there must be a clear understanding that the parent is obliged to repay that credit line or second mortgage.
Co-Sign
Co-signing on a mortgage means agreeing to take over mortgage payments if the borrower named on the mortgage stops making payments. Parents can include their name on a mortgage as a co-signer, which can help home buyers increase their chances of loan approval at an affordable rate.
A co-signing arrangement makes sense if the child has savings, yet doesn’t have a high enough credit score to get the mortgage. The co-signer can assist in this regard, though it makes them equally liable for the entire mortgage.
Use A Government-Backed Program
The federal government offers some programs designed specifically to help home buyers come up with a down payment for a home purchase:
Home Buyers’ Plan (HBP)
The Home Buyers’ Plan allows first-time home buyers to borrow up to $60,000 from their RRSPs to be used for a down payment. Couples can access up to $120,000 when they each borrow from their RRSPs.
First Home Savings Account (FHSA)
The First Home Savings Account is designed to help young Canadian home buyers save up money to buy their first home. Eligible borrowers can use this tax-free account to save up to $40,000 for the purpose of a down payment. Plus, contributions are tax-deductible, so you can reduce your taxable income when you file your taxes.
Bottom Line
Gifted down payments can be a great way for Canadians to access housing that they otherwise couldn’t afford. Parents can help their children financially and set them up for the future by putting a mortgage within reach. If you’re lucky enough to be a recipient of a gifted down payment in Canada, make sure the funds are accompanied by a gift letter and any other paper trail your lender may want to see.
Gift For Down Payment FAQs
What is a mortgage gift letter?
Is gift money taxable in Canada?
Does my gifted down payment have to be from my immediate family?
Note: Loans Canada does not arrange, underwrite or broker mortgages. We are a simple referral service.
