Families have supported the endeavours of children in establishing a home since the inception of the real estate market. Traditionally, parents would provide financial support to a child after marriage to contribute to the downpayment on the home. The actual amount of the gift varies based on the economic situation; and, while the cultural specifics adapted over time, many families continue this tradition.
The approach to gifting differs now, particularly since the Canadian housing market has shown drastic upwards trends, with the cost of a home increasing by 17.1 percent year-over-year. Coupled with the increase in the consumer price index of 4.6 percent at the end of 2021, it has become even more difficult for young Canadians to access housing. Because of this increase in the cost of living, these gifts are much larger than in previous years. To apply a gift towards your down payment, it’s important to understand what it is, and how it can change your mortgage experience.
Can You Use Your Gift Money As A Down Payment?
Money that you receive as a gift can count as a down payment for a home you want to purchase. However, many mortgage lenders will only accept gift payments as a down payment if it was gifted by an immediate family member such as a parent, grandparent, or sibling. The reasons are, the lender wants to ensure that the gift money you receive is not a loan and that you don’t have to repay it.
Depending on the mortgage lender, they may require you to provide a mortgage gift letter to prove that the funds are, in fact, a gift. This distinction is important to lenders because if the gift money is a loan you must repay, it can impact your debt-to-income ratio and your ability to handle the mortgage payments.
Will A Gifted Down Payment Be Taxed By The CRA?
Canada doesn’t have a gift tax, so you can receive gift money from an immediate member of your family without incurring a tax burden.
What Is A Mortgage Gift Letter?
A mortgage gift letter is a document that verifies that the gift money you receive is, in fact, a gift that you do not have to repay. The document itself is fairly straightforward since it simply requires the information of the sender and the recipient.
In essence, it is merely a document that assures the lender that you aren’t bound by another loan that can cause financial stress and impede your ability to pay the mortgage. Ultimately, the mortgage gift letter ensures that the lender can accurately calculate your risk as a borrower.
What Needs To Be Included In A Mortgage Gift Letter?
A mortgage gift letter is like a contract, it has key components that must be present for it to be valid. These include:
- Recipient name (name of one or both of the borrowing parties)
- Gifter’s name and relationship to the recipient
- Physical address and phone number of the gifter
- Method of the money transfer
- Address of the mortgaged property
While you could create a DIY mortgage gift letter, most mortgage lenders will have a standard copy on file. You’ll simply need to fill out the document with the appropriate information (as mentioned above). For most situations, the mortgage gift letter will be enough, however, in some other cases, you may also require proof of the money’s source.
Mortgage Gift Letter Example
To whom it may concern,
I, [name of gifter], certify that I will give a gift of [amount] to [name of giftee], [relationship], on [date]. The amount will be applied toward the purchase of the property at [address of property].
I write this letter to certify that this payment is a gift and that [name of gifted] is under no obligation to repay the amount. No part of this gift was provided by a third party with an interest in buying the property, including the seller, real estate agent and/or broker.
I have given the gift from the account listed below, and have attached the appropriate documentation to confirm that the money was received by the applicant.
The source of this gift is:
[Type of account]
[Name of financial institution]
[name of gifter]
[address of gifter]
[phone number of gifter]
Proof Of Gift Money
Sometimes the lender may ask for the gifter’s bank account statements in order to confirm that the funds you received indeed came from your gifter. However, this isn’t a mandatory requirement. In general, the lender only needs to see that the gift money has been deposited into the giftee’s bank account.
The Effect Of Self Employment On Gifted Down Payments
Once the bank (or alternative mortgage provider) approves the gifted funds, there are still rules about where the mortgage down payment comes from. Especially if you’re looking to apply for a self-employed mortgage. If you’re self-employed, you must provide at least 5% of the down payment. Even if you receive a gift of a full 20%, you must pay 5% of the total down payment. While you can take the value of the remainder and use it to make mortgage payments subsequently, it cannot apply toward the downpayment of the mortgage.
The need to pay that amount pertains to ownership of the real property and mitigates the risk of default (since it ensures that you can reasonably make the payments and aren’t solely reliant on outside funding). Accurately representing your finances to the bank allows them to conduct a proper risk assessment on you as a borrower. This measure also ensures that the mortgage belongs to the person named on the loan document.
Gifted Down Payment Rules In Canada
Depending on the mortgage lender, there are certain requirements that must be met for a gifted down payment to be accepted. Here are some rules surrounding gifted down payments in Canada.
- Must Be From An Immediate Family Member – In general, the down payment gift must come from an immediate family member (grandparent, parent, sibling, or child).
- Proof Of Funds Isn’t Mandatory – While proof of funds is not obligatory in all cases, the lender may request them.
- The Lender Usually Provides The Mortgage Gift Letter – Each institution has its own template; a form that ensures all necessary information is included. In most cases, it’s also the lending institution that completes the gift letter.
- Gift Cannot Be A Loan – The gift letter will state that the gift money is a present, not a loan; that there is no need to repay the amount.
- Mortgage Gift Letter Has An Expiry – It’s important to note that the gift letter comes with an expiration date. Since financial institutions request 90 days of banking history, this is the standard time during which you must close on the home.
Mortgage Gift Letter FAQs
Is the mortgage gift money taxable?
How much gift money can I use for a mortgage?
Who can gift money for a down payment?
The more money you can put down on your mortgage, the more likely you are to receive better interest rates and improved loan terms. Ideally, the gift allows you to pay the full 20% of the home value, with the gift letter proving where the funds originate. Any financial institution that issues mortgages seeks candidates that are reliable and have a trustworthy banking and credit history. You can prove this by showcasing the source of funds, particularly the lump-sum amount issued as a down payment.
When you plan ahead by including a gift letter, it shows prudence and a strong understanding of the mortgage process. Ultimately, the key to a successful mortgage is planning ahead by keeping your credit score as high as possible, reducing debt, and making a financial plan that allows you to make a purchase when your ideal home hits the market.