As home prices and interest rates increased this year, some Canadian families are choosing to help their kids get a foothold in the real estate market. One of the ways they’re doing that is with gifted down payments.
A 2021 CIBC report said 30% of first-time buyers in Canada got a boost thanks to receiving money as a gift for a down payment on a home. James Harrison, Mortgage Broker at Mortgages.ca estimates that, in some markets, that number is a lot higher, with gifts ranging anywhere from $10,000 to more than $1 million. There is no limit to the amount that can be gifted.
“At least two-thirds of my clients are getting a gift of some amount,” he says. “Parents just want to help their kids buy, with the goal often being a 20% down payment.”
According to the CIBC report, in 2015, the average Canadian gift was $52,000. In 2021 it was $82,000. Gifts in Vancouver lead with the highest average in Canada, clocking in at $180,000, and Toronto a close second at $130,000.
What are gifted down payments?
A gifted down payment is exactly what it sounds like: a monetary gift from a parent, grandparent, sibling, or other close relative, towards the purchase of a home. It isn’t a loan; it’s non-repayable. 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, but 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. Your income determines the max you qualify for, and the down payment is on top of that. Of course, the more of a down payment you have, the less you’ll need to borrow. So if you only qualify for a smaller loan, a gift can help you buy something bigger than you could otherwise afford.
“A gift can also get you from an insured purchase (less than 20% down) to a conventional one,” says Harrison. “Insured only gets you a max 25-year amortization, with strict debt ratios. But with 20% or more down, you could potentially qualify for a 30-year amortization with more give on the 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 template). Harrison says 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, according to Canada’s Financial Transactions and Reports Analysis Centre (FINTRAC). 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 looking 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 info pertaining to your specific financial situation.
That being said, Harrison suggests to his clients they consider protecting the gift in the event the recipient splits from their partner. Otherise, half your gift could end up with the departing spouse/partner.
Getting into the real estate market can provide plenty of benefits, like housing stability, an investment opportunity for yourself, and 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 so they can begin their homeownership journey.
The information discussed in this article should not be taken as financial or legal advice. This article is for informational purposes only.