What are gifted down payments and how do they work? (CTV News)
With the average home price at a record high, Canadians are having to fork over more cash for homes than ever before. In response, mortgage experts say they have been seeing more and more relatives gifting down payments to family members to help cover the initial costs of purchasing a home.
Based in Surrey, B.C., Mick Gill is an accredited mortgage professional with Dominion Lending Centres, a national mortgage and leasing company. Even prior to the COVID-19 pandemic, he said the steady rise in home prices across the country has led gifted down payments to increase in both prevalence and size.
“Affordability becomes a huge concern now, so it's become increasingly more common,” Gill told CTVNews.ca in a phone interview on Thursday. “And dollar amounts have certainly increased as far as the amount of gifted down payments these days… We're now into the hundreds of thousands.”
Oftentimes, parents will chip in with enough money to help their children cover a down payment that amounts to 20 per cent of the home’s purchase price, said Shubha Dasgupta, board president of the Canadian Mortgage Brokers Association’s Ontario branch. Buying a home with a down payment of less than 20 per cent will require mortgage loan insurance, he explained, an additional fee aimed at protecting lenders in the event that homebuyers can’t make their monthly mortgage payments.
“Over the last couple years, because we've seen real estate prices and home prices grow at an accelerated pace… a lot of parents are looking at this as a way to support and help their children,” Dasgupta told CTVNews.ca in a phone interview on Thursday. “That 20 per cent is like a threshold where parents are trying to get their children into what is an insured mortgage and [avoid] having to pay a mortgage default insurance premium.”
Mortgage Professionals Canada board chair Joe Pinheiro, who is based in Toronto, said gifted down payments have become particularly common among first-time homebuyers looking to enter the market. A report released by CIBC in October 2021 revealed that nearly 30 per cent of first-time homebuyers received gifted down payments from family members during the previous year. Additionally, about two thirds of first-time homebuyers who received a gift said the money accounted for most of their total down payment.
“For a lot of people, the gifted down payment is the only way they are going to be able to get into homeownership,” he told CTVNews.ca in a phone interview on Thursday. “The purchasing power has gone down dramatically for several buyers, yet prices have gone up, so to make up that gap, they have to go to mom and dad.”
The portion of first-time homebuyers in Canada that have received gifted down payments from family members has risen gradually since 2015, according to the CIBC report. With that in mind, Dasgupta, Gill and Pinheiro outline key considerations that should be taken into account for those looking to give or receive a gifted down payment.
WHAT DO YOU NEED TO PREPARE A GIFTED DOWN PAYMENT?
In order to grant a gifted down payment for a home, all parties will need to sign a mortgage gift letter, said Gill. Most lenders will use their own version of this document when preparing the gift, although the format is similar from lender to lender, he said. It will outline the names of those granting and receiving the gift, as well as their relationship to one another and the amount of money being gifted towards the purchase of a home. The letter will include their signatures and contact information as well.
Lenders will also require proof that the money has been deposited into the borrower’s bank account, whether through a direct transfer or bank draft. This is to ensure there is full transparency around the flow of funds and to help verify where the money came from, Pinheiro said.
“Be prepared to demonstrate to the lender where exactly this down payment is coming from,” he said. “Sometimes gifted money can be laundered money, so there’s that responsibility to ensure that this is actually a true gift from the source that they claim it to be from.”
Funds should be transferred at least 15 business days prior to the closing date of the mortgage, Dasgupta said, and given directly to the homebuyer.
WHO CAN GIFT A DOWN PAYMENT?
When it comes to gifting down payments for a home, the money must come from an immediate family member, said Gill. This includes parents, grandparents and siblings.
If the money is gifted by anyone other than an immediate family member, such as a friend or colleague, then it may come with the expectation that it will be repaid at a later date, Gill said. A gift, however, is considered a non-repayable sum of money.
“What the lenders would worry about is if you have a friend or someone else that's not an immediate family member giving you this money, there's probably some terms of repayment that aren't being disclosed,” said Gill. “It’s not that common that someone outside of your family is just going to give you money and not ask for it to be repaid at some point.”
If someone such as an aunt, uncle or other close family member is gifting the money, there must be a clear reason as to why they would do so, Pinheiro said.
“Anything other than [parents or grandparents], the lenders, rightly so, are going to want to see more documentation and evidence that supports it to be an outright gift,” he said.
IS A GIFT CONSIDERED A LOAN?
Since this money is being given as a gift, it’s not considered a loan, Gill said. This is part of the reason why only immediate family members are eligible to gift down payments – if the money was coming from someone else, chances are there would be some kind of arrangement for repayment, which would then classify the transaction as a loan, he said. In the case of a gift, there’s no repayment involved.
This means that the gift does not impact the borrower from a liability perspective, said Dasgupta. In other words, the homebuyer does not have another debt to repay that could potentially jeopardize their ability to pay off their mortgage. Loans are not only repayable, but also have an impact on mortgage applications, whereas gifts do not, he said.
“If they have another debt that they have to repay if this was a loan, that impacts their ability to make the mortgage payment,” Dasgupta said. “The mortgage lender wants to know that if they're getting this money, they don't have to pay it back [and] it doesn't impact the client's ability to repay their mortgage.”
Additionally, gifted down payments are not taxed, said Dasgupta.
“Canada is one of the few nations that don't have a tax implication towards an immediate family member’s gift,” he said. “A parent is able to provide this to their children without any tax implications on either side.”
IS THERE A MAXIMUM AMOUNT THAT CAN BE GIFTED?
There’s no limit on the amount of money that can be gifted as a down payment, said Gill. However, the higher the amount of money that’s gifted, the more lenders will be required to monitor the payment and any risks associated with it, he said.
Even if receiving a gifted down payment, homebuyers will usually put down a certain percentage of their own money when purchasing a home, such as five or 10 per cent, Gill said. If most of the down payment is made up of gifted money, lenders will need to look at whether or not those planning to buy the home can actually afford to keep up with mortgage payments in the long run, he said.
“Do they have enough of their own [money] to be able to really take responsibility for the mortgage?” said Gill. “There has to be some justification behind that.”
There are, however, situations where family members will cover the entire cost of a down payment for a house through gifted money, said Dasgupta, provided it is accepted by the lender. But this presents additional risks, said Gill. If a divorce, job loss or other change in life status causes the agreement to fall through, the homebuyers themselves have little to no accountability.
DOES A GIFTED DOWN PAYMENT GUARANTEE MORTGAGE APPROVAL?
Just because someone is receiving a gifted down payment, this does not mean their mortgage application will automatically be approved, Gill said. Applicants are still expected to meet the necessary requirements to qualify, similar to anyone else who is applying for a mortgage without a gifted down payment. This includes proving credit worthiness based on income and expenses, said Pinheiro.
However, gifted down payments will often help homebuyers qualify for higher mortgage amounts, he said.
“In this market, you may not qualify for the ideal home that you're looking for, but with a gifted down payment decreasing the mortgage amount, now you qualify,” said Pinheiro. “So it's not guaranteed, [but] it helps with qualifying.”
This also presents homebuyers with more options when looking on the market, he said.
WHAT ELSE IS THERE TO CONSIDER?
The biggest consideration to keep in mind for those gifting down payments is that there should never be an expectation that this money will be repaid, Gill said. Additionally, anyone gifting a down payment is not entitled to ownership of the home – they won’t be registered on title or on the mortgage.
“You can't come back three or four years later saying, ‘We lent you $200,000, we'd like to get that back,’ or, ‘You sold your home, we'd like to get our money back’,” said Gill. “That's why the banks will have a gift letter stating that this is non-repayable.”
Pinheiro also advises his clients to be mindful of exactly where this money is coming from and how it is being provided, he said. If parents are looking to remortgage their home in order to gift a down payment for their children, for example, they must consider whether they will be able to meet their debt obligations as a result, he said.
“If you're 65 and you've taken $300,000 from your line of credit, you have to ensure that you're going to be able to sustain those payments,” he said.
Meeting with a mortgage broker in advance can be helpful in determining whether someone has enough funds to provide a gift in the first place, and to answer any questions about the process, Dasgupta said.
“Understanding what options are available and whether or not it's financially viable for them would be a great head start in this process,” he said.