Rules for gifting a down payment in Canada
It has become more and more common these days for parents or families to gift their family members money in order to help them buy homes, usually in the form of down payment funds. For most young people in the country, homeownership is essentially out of reach without some form of help as down payments have grown so large in the past decades. However, it’s not as simple as handing your child a stack of cash to go and get a mortgage. There are important considerations that have to be made, both on the giving and receiving sides before any gift is made. In this article, we will cover some gift rules such as who can give and receive down payment help, how much can be gifted for a down payment, how the funds are taxed, what is a mortgage gift letter, and more.
Who can gift money?
Usually, anyone can give money to whomever they want, however, when it comes to gifting money for a down payment, it should usually come from an immediate family member. This is most commonly a parent or grandparent, but could also be a sibling or child. Most mortgage lenders prefer that these gifts come from direct family, so gifts from friends are off the table for conventional mortgage loans. In some cases, you may be able to be gifted by a more distant relative like an aunt or a cousin, but this will depend on the lender and you may be required to prove your relation to them. You also can not get around the close family rule by having someone else give money to a close family member who gives it to you. Your lender may require proof that the money actually came from the gifters bank account by checking banking statements.
How much can I give?
If you are gifting a down payment, you can essentially give as much as you want, though most people like to put 20% down on their homes. In most cases, a buyer can get a mortgage with the entire down payment gifted, however, if they are self-employed they will be required to put up 5% of the down payment themselves.
How is it taxed?
Luckily, there is no gift tax in Canada for gifted down payment money. This means that regardless of how much you give, neither the gifter nor the recipient is required to pay taxes.
A gift is not a loan!
You should also know as the person who is providing the money that this is not a loan. Any money gifted for a down payment must be provided with no expectation of repayment, and the gifter must legally certify as much. You could loan money to your family member, but this would not be considered a gift anymore. It would instead be considered an investment and would be subject to the relevant taxes as well as potentially adding to your recipients’ total debt service and affecting their mortgage applicability. The gifter is allowed to give borrowed money if they want, for example, if they have taken money from a home equity line of credit but they will still be required to pay back the borrowed money and interest on their own with no help from the recipient.
What is a mortgage gift letter?
If you decide to go forward with gifting money for a down payment, you will need something known as a mortgage gift letter. Generally, the mortgage lender will want to know where the gifted money came from, how much it was, and to confirm that this money is, in fact, a gift with no obligation to be repaid. This is where mortgage gift letters come in. The gifter will provide this letter to the recipient to provide to their lender. Without a mortgage gift letter, your recipient may be unable to secure a mortgage as the lender will not be able to verify their financial situation. Here are some things you should include in your mortgage gift letter:
• Name of the gift recipient
• Name of the gifter and relationship to the recipient
• Amount of money gifted
• Date of gift
• An explicit statement that the money is a gift to be used for a down payment and that you have no expectation of repayment.
Considerations before gifting.
While it’s fantastic to be able to give your family member money to help with a down payment, there are some considerations you may want to make before you make this decision. As mentioned before, this gift can not be repaid, so be sure that you actually have the money to spare before you gift it. Also, consider that this is only a gift of money and does not guarantee a home. Your recipient will still need to apply and be approved for a mortgage on their own. This means that they need to have acceptable financial credentials for the lender to consider them. If your recipient does not have a good enough credit score, a steady income, or too much debt, they may still be unable to get a mortgage even with your help.
The recipient will also still need to pay monthly home loan payments. Though you can help them through the saving phase and assist them in getting a down payment, they will need solid financial skills on their own to ensure that they can maintain their mortgage. There are more costs involved with buying a house than just the down payment. Though you can give a full down payment in some cases, the mortgage borrower will still be required to pay their own closing costs for the sale. These closing costs that comprise legal fees, home insurance, inspections, and more, can add up to thousands of dollars above the purchase price. Overall, just make sure you and your recipient understand what exactly it means to give money for a downpayment, and what will still be required from both sides. Though you can't expect any money back from the gift, you do give it with the hopes that your recipient will be happy in their new home. If they are unable to keep up with their mortgage, you may have lost out on that money with nothing to show for it.
Courtier hypothécaire/Mortgage Broker
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