What it Means to Gift a Down Payment in Canada

In the last few years, home prices have continued to hit record highs all over Canada, especially in Ontario. While this is great for sellers, it isn’t for home buyers, especially first-timers. These folks are struggling with the effects of having to save for a larger down payment just to meet the minimum down payment requirements. 

I never want to see anyone priced out of the market, and I always encourage potential buyers to look into available options to ensure they are secure enough to buy a home. One option is to ask good ole mom and dad for help (though understandably, some prefer to avoid going that route). Gifting a down payment for a house in Canada isn’t new, but it has become an increasingly popular way for young homeowners to break into the market. 

For many, buying a house is a milestone of adulthood. It’s likely that your grandparents even helped your parents with their home in some way. The monetary gift-giving process in Canada has remained largely the same, and these transactions are non-taxable, although the amounts have gone up substantially. 

Here’s what you need to know about giving a down payment in Canada.

This is a Gift, Not a Loan

It’s important to remember the fundamental wording of gifting: something given willingly without the assumption of repayment. Think of it as the ultimate Christmas present; mom or dad wouldn’t ask for it back in July, would they? As a result, most gifting of a down payment in Canada comes from the immediate family, usually parents or grandparents. This shows the lender that the money is given in good faith. It is also important that this money is not associated with being a loan, because it would then impact the debt load of the homebuyer, which could negatively impact their application for a mortgage.

Signing a Mortgage Gift Letter

Since the specifics of giving a down payment are important, most mortgage lenders will want the person giving and the person receiving to sign a letter. These are often templated and have similar wording, and the purpose is the same: it will ultimately absolve the lender of any hesitancies when it comes to the veracity of this gift. This provides confirmation that the money is not tied to owning the house in some way, nor is it implied that the money would be returned when or if the property is sold. The letter will outline a few key details, including:

• The names of the persons giving and receiving the gift, and their relationship. 
• The amount of money along with proof of the transfer, such as a bank draft. 
• The contact info of both people.
• Two signatures along the bottom. 

Once the letter has been signed, some lenders only consider it valid for 90 days, meaning the money must appear in your account within that time. However, most lenders want to see the down payment funds in the buyer's bank account within 30 days of a closing date. If the letter expires, you may need to sign another one.

There is No Limit on the Amount

Since there is no tax on giving a down payment in Canada, parents or grandparents can choose to give as much as they want. In fact, they could give you the full price of the house if they have the funds. Some homebuyers will contribute a percentage or portion of their own money to add up to 20% of the down payment to avoid mortgage insurance.

It Doesn’t Guarantee Mortgage Approval

A down payment is an important piece of the puzzle when applying for a mortgage. However, a potential homebuyer will still have to go through the same approval process as everyone else even if they have been given their down payment. The lender needs to ensure they can afford to pay their monthly mortgage, and as part of the process, will request a bank statement from the previous 90 days to ensure their savings are in order. If you are being given money to purchase a home for a higher amount than what you can afford, or than what your savings could help you afford on your own, you may be tempted to look at higher-priced houses, but you need to ensure that you can still make payments each month. 

As with all presents, gifting a down payment in Canada should come with no strings attached. It will bring you one step closer to owning a home in your price range, and you will likely never forget that gift from your family. 
I’m all about ensuring that buyers are able to afford houses that are right for them, starting with mortgage options that set them up for success. If you are considering giving a down payment for a house in Canada or are the recipient of one, I can help you with the next steps. Reach out to learn more!