It’s becoming more and more common for parents to help out their children who are buying their first house by gifting them a large amount of money to use for their down payment. According to Mortgage Professionals Canada, down payment gifts from parents have doubled since 2000-2016 from 7% to 15%. With house prices getting so high, it is challenging to afford a house on your own. However, it isn’t as simple as your parents handing you a wad of cash for your down payment. There are a lot of hidden things to consider before heading to the bank and investing the money in your new home.
Who can gift money for a down payment?
It’s much better if an immediate family member gives you your down payment as a gift. Most mortgage lenders prefer this because they would be taking a risk if you accept money from a distant acquaintance. In some cases, an aunt or cousin may be very close to you, but the lender may ask you to prove your relationship to them.
Do you have a close friend who is practically a family member that is offering you money as a gift? That’s not completely off the table. If you work with a mortgage broker, they will help you find a lender that will accept the down payment and give you a mortgage loan. In some cases, it may be easier for that friend to give the money to your family member. However, the lender may require proof that the money came from their bank account by checking banking statements.
How much money can you gift for a down payment?
There is no rule regarding the amount you can accept or give to someone to use for a down payment. The most common amount people pay down is 20% on their homes. However, if you are self-employed, then you must also put 5% down on your new home to prove to your mortgage lender that you have the financial stability to pay your monthly fees.
Will you get taxed for gifting a down payment?
There is no tax on gifting money in Canada. However, if you take the money out of an RRSP, then that money is taxed when it’s withdrawn. The person who withdrew it from the RRSP is the one that pays that tax. So, if your father or mother withdraws money from their RRSP to give to you for your down payment they would pay tax on that amount withdrawn. You being the one accepting the money would not.
Clarify that the money is a gift…not a loan
Lenders will not be happy to find out that you plan on paying back the person who gifted you the down payment. In this case, the money will be considered an investment that adds taxes. If the lender sees that, your mortgage eligibility will change and your total debt will increase. To the lender, this looks like you’re more of a risk than an investment.
You will need a “Mortgage Gift Letter”
This letter is made for the mortgage lender so they can be assured that the money is a gift and not a loan. This proves that you are less of a risk, and you’re more likely to get pre-approved for a mortgage.
You should include:
- Name of the gift recipient;
- Name of the gifter and relationship to the recipient;
- Amount of money gifted;
- Date of gift; and
- An explicit statement that the money is a gift to be used for a down payment and that there is no expectation of repayment.
Work with an experienced mortgage broker
Remember, there are additional costs to consider when buying a home as well as the down payment. On top of the monthly mortgage fees, you have to pay a land transfer tax, real estate fees, closing costs, and so on. You must be able to prove to your lender that you are financially capable of paying the additional costs to get pre-approved for a mortgage. By working with a reputable mortgage broker like myself, Darren Robinson, you will have access to more mortgage options than you would find at the bank while also getting the best mortgage rate possible. I’ll help you through the process of getting pre-approved with a down payment as a gift so you can move on to the fun part; house hunting!