With rapidly increasing home prices greatly outpacing growth in salaries and incomes, it is becoming very difficult for first-time buyers to save for a downpayment so they can get into the housing market.
As a result, it is now becoming more common for parents to assist their children gifting money towards a downpayment for a home.
Gifting money towards a downpayment means that you are not obligated to repay the person gifting you the money. In most cases, the parents who are gifting money towards the down payment will not own an interest in the property either.
In Canada, you can typically buy your first home by paying 5% down. However, it is advisable to put in 20% down. Because, when you pay less than 20%, you are obliged to purchase mortgage insurance, which increases your overall monthly payments.
If you’re one of the lucky ones to receive a cash gift towards your downpayment, the buck doesn't stop there. Your lender will typically ask for something called a gift letter.
A gift letter may be required by your lender to show and prove that you are indeed getting a part or your entire down payment as a gift and from who. It’s an important distinction that proves that you do not have any other debt obligations when applying for a mortgage.
- A gift letter is a document used by mortgage lenders to ensure that monetary assistance given by family members to help you cover a mortgage down payment will not need to be paid back.
- Mortgage Gifts may only be made by direct family members and are non-taxable in Canada.
- While gift letters are enough to help you cover your down payment, mortgage lenders require far more proof before they certify your loan.
What is A Gift Letter?
A mortgage gift letter is a document completed by your benefactor (the person or people giving you the money) that declares that a one-time monetary contribution they’ve made to you has been given as a gift to be used for the down payment of the mortgage you are applying for.
The distinction in a gift letter that the money given, is a gift, is important as your mortgage lender needs to confirm that you will be under no obligation to pay the money back.
Your mortgage lender wants to know that you are financially capable to make your monthly mortgage payments to them. If they cannot confirm that the money you receive from your benefactor is a gift, they will see it as added debt that will increase your financial stress and make it more difficult to pay your mortgage. Therefore, there is a possibility that they may not approve you for the mortgage.
What Does a Gift Letter Look Like?
Many financial institutions will have templates or examples of gift letters that you may use, however if you choose to write your own, make sure your gift letter includes:
- The name of the mortgage borrower.
- The donor’s name, address, and phone number.
- The donor’s relationship to the borrower.
- How much is being gifted and when it was gifted.
- A statement saying that the money is a gift and that it is not to be paid back
- The property’s address.
Will a Gift Be Taxed?
Unlike the United States, Canadians don’t have to fear a “gift tax”. You can be gifted any amount of money at any time with no tax implications.
Gifting a downpayment must be made by a member of your immediate family. That includes parents, siblings and grandparents. In rare circumstances, individuals with special relationships (such as godparents or close family friends) may request permission from your lender to provide a mortgage gift.
The amount of your mortgage down payment that may be covered by mortgage gifts can vary from lender to lender.
It’s important to remember that although you may receive help from family to cover your down payment, that may not be enough to ensure you are approved for a mortgage. You will need to ensure that you meet criteria in terms of credit score, income and much more.
As helpful as gift letters can be, there are many rules and criteria you need to review before you can be approved. If this looks overwhelming to you, rest assured that the Deeded team is here to help however we can.