Everything You Need to Know About Gifted Down Payments

As home prices have increased, many Canadian families are choosing to help their kids get into the real estate market. One of the ways they are doing that is with gifted downpayments.

A CIBC report in 2021 said 30% of first-time buyers in Canada got a boost by receiving money as a gift for a downpayment on a home. Some say that number is a lot higher in some markets. Apparently, gifts range anywhere from $10,000 to more than $1 million. There is no limit to the amount that can be gifted. Parents want to help their kids buy. Often the goal is a 20% downpayment so they can avoid insurance on their mortgage.

According to the CIBC report, the average gift in Canada was $52,000 in 2015. In 2021 it was $82,000. Vancouver and Toronto lead with the highest averages in the country at $180,000 and $130,000 respectively.

What are gifted down payments?

A gifted down payment is exactly what it sounds like. It is a monetary gift from a parent, grandparent, sibling, or other close relative, towards the purchase of a home. It isn’t a loan; it doesn’t have to be repaid. The person doing the giving should have zero expectations of getting that money back, and will often be asked to sign an agreement to that effect.

How are gifted down payments different from co-signing?

When you give a gift, you don’t own any part of the property. You also don’t assume any of the risk. If you co-sign, you are on the title and 100% liable if the homeowners default on their mortgage. Co-signing can also impact your ability to borrow. Whatever amount you have co-signed for will look like you borrowed it yourself.

Do gifted down payments have any impact on a mortgage approval?

No, they don’t. Your income determines the maximum you qualify for, and the down payment is on top of that. Of course, the greater the downpayment you have, the less you’ll need to borrow. If you qualify for a smaller mortgage, a gift can help you buy something more than you could otherwise afford.

A gift can move you from an insured purchase to a conventional one. Insured is less than 20% down. An insured mortgage only gets you a maximum 25-year amortization with strict debt ratios. But with 20% or more down, you could potentially qualify for a 30-year amortization and more give on the debt ratios. That can make a big difference in the total mortgage you qualify for.

What are the rules around gifted down payments?

Everyone needs to sign a mortgage gift letter. Each lender has their own format. You must also provide proof that the gifted funds have been deposited into your account, and they should be there no later than 15 days before closing. For funds coming from outside Canada, lenders want to see those in your Canadian account 30 to 90 days before closing.

Depending on how gifted funds are used in the transaction, there may also be obligations to comply with Canada’s anti-money laundering laws. For example, if the gifted funds are provided directly to the REALTOR®, the REALTOR® would have an obligation to verify the identity of the individual providing the funds.

Can we use borrowed funds to gift money to our kids?

Yes, you can. However, it’s probably not as common as you think. Only about 5.5% of gifting parents use debt to finance gifting. If you’re considering using your line of credit, just be careful about your debt load, especially if you’re planning to retire anytime soon.

Are there any tax implications to gifting a down payment?

In Canada, gifted down payments aren’t taxed. Immediate family members can provide the gift without either side being on the hook taxwise. Of course, it’s always prudent to check with a tax professional for information pertaining to your specific financial situation.

Consider protecting the gift in the event the recipient splits from their partner. If you don’t, half your gift could end up with the departing spouse/partner should that happen.

There is more information to help you get your down payment together. Read Down payment planning: examining RRSPs, TFSAs and FHSAs.

Getting into the real estate market can provide a lot of benefits. It can give housing stability, so you don’t have to worry about the landlord selling the house or condo you are in. It can act as an investment opportunity for you and provide numerous social benefits. Helping your immediate family members with a down payment, if you’re able to, can be a great way to get them into the market. It may be the best (or only) way they can begin their homeownership journey.

Contact me to learn more!