The Greenhouse
by Pine

How you can get a gifted down payment in Canada

Gifting or receiving a down payment is an amazing way to boost your buying power.

It's a gift that keeps on giving.

How you can get a gift down payment in Canada

If you’re a first-time home buyer or applying for a mortgage on a single income, you know how difficult it’s gotten to purchase a home in recent years. Rising interest rates and a strong seller’s market have created a perfect storm of unaffordability for many Canadians, who are still recovering from the financial impact of the pandemic. As a result, buyers are increasingly relying on co-borrowers or other sources of income to qualify for higher mortgage amounts, including gifted down payments.

For many Canadians, the Bank of Mom and Dad has become a common place to turn. Because, according to OREA, four in 10 parents helped their children afford their properties last year by boosting their down payments. 

The gift keeps on giving after you purchase too, as a bigger down payment means lower monthly costs over the length of your term. If you’re able to put down 20% of your purchase price or more, then you also save on paying mortgage insurance, which is mandatory for anything below a 20% down payment in case you default on your loan. 

The best part? You won’t be taxed on gifted down payment money, if you play by the rules.

How does gifting work?

In Canada, gifting is reserved for immediate family members, like your grandparents, parents, or siblings. That’s because lenders believe there’s a lower chance that you’ll have to eventually pay back the amount to a relative over a friend or a colleague.

There is no limit to how much you can give or receive, but the average gift is around 20% of the purchase price to avoid insurance fees. 

Your lender will also need a paper trail proving where the gift money came from and where it’s been deposited prior to payment to satisfy anti-money laundering and anti-terrorist funding regulations. On top of all the documents your lender we’ll need, you’ll also need your gift giver to write a gift letter–or in this case fill out a standard form provided by most lenders for consistency and auditing purposes–stating the exact amount and that they do not expect repayment to legally prove that the money has no strings attached.

When you put together your gift letter, make sure you include the following details: 

  • The donor’s name and relationship to the recipient (whether they’re your grandparent, parent, or sibling) 
  • Recipient's name 
  • Donor and receipient’s signatures
  • The total amount of money gifted
  • Date of gift
  • A statement confirming that the money is a gift to be used for a down payment with no repayment obligation
  • Contact information for donor and recipient

How detailed does your paper trail need to be?

When it comes to the paper trail, you need to be as detailed as your lender needs. Generally, providing three months of bank statements and a transfer receipt with your mortgage application is enough. However, the gift giver will also need to submit proof of funds to show where the gift money came from. If you are receiving funds from overseas, be sure to keep track of all correspondence and financial information about the down payment in case your lender needs it. 

How can you become a gift giver?

Granting a loved one the gift of homeownership is no easy feat. Before making this big decision, make sure you can comfortably afford to give the money away in the first place. Communicate your expectations to everyone involved and ensure you understand their intentions entirely. Gifting a down payment will not guarantee a purchase: the recipient will still need to apply, get approved, and meet the criteria set out by the lender–which can include their income, debt-ratios, and credit score.

If you’re looking to give a down payment to your child–or family member–one way is to take out a home equity loan against your own home. The cash is considered a loan so you won’t be charged income tax, and you can use as much of it as you want to help a loved one reach their goal of being a homeowner. Another way is to simply fork up the cash if you have it on hand.

If you’re not comfortable with those options you can opt for being a co-borrower or guarantor on the property, but your gift will be considered an investment and you’ll be subject to taxes. This way, you can ensure your loved one has a place to live and when you both decide to sell the home, you get some or all of your money back.

Final thoughts

Gifting or receiving a down payment is an amazing way to boost your buying power. If you’re lucky enough to have family members who are willing to help you afford a home, cherish them and make sure your finances are in good standing so you can follow through on buying your home.

And if you’re ready to start your home buying journey, apply with Pine today and we’ll get you in touch with one of our mortgage agents to answer any questions and help you understand what you’ll need to turn your dream home into a reality. 

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