How To Gift A Down Payment

The Increasing Importance of  Gifting

Over the past several years, and especially since the beginning of Covid, house prices have increased dramatically. While this is putting homeownership out of reach for many Torontonians, we are still seeing lots of young families buying homes in the $1-$2 million price range. How is this possible?

The first part of the answer is interest rates. Mortgage rates have been historically low for quite some time (though that could change this year), This means that a young couple with two incomes can afford a very large mortgage, even when subjected to the ‘stress test’ which requires them to prove that they can afford a mortgage rate 2% higher than their actual rate.

The second part has to do with down payments. To purchase a home with a price over $1 million, the minimum down payment is 20%. For example, if the price is $1.5 million (which isn’t that high for a house in Toronto), the minimum down payment would be $300,000. To add insult to injury, the double land transfer tax on this house would be $44,475 for a first-time buyer. How do they manage to accumulate so much money?

For move-up buyers, the answer is simple. These young families bought a starter home or condo a few years ago, and have enjoyed rapid value appreciation since then. This accumulated equity becomes the foundation of their down payment on their next house.

For first-time buyers, it’s not so simple. This is where ‘the bank of Mom & Dad’ comes in. More and more, these buyers are turning to their parents to gift them money towards their down payment. According to Benjamin Tal at CIBC, about 30% of first-time homebuyers received help from family members in 2021, up from 20% in 2015. The average size of the gift was $52,000 in 2015 and $82,000 in 2021. In Toronto the amount was even higher, averaging $180,000 in 2021. The urban myth is that many parents are going into debt to come up with this money Yet, Mr. Tal says the evidence indicates that only 5-6% of gifting parents use debt to finance the gifts. It’s estimated that gifting accounted for about $10 billion in Canada last year, which is about 10% of total down payments.

Rules for Gifting

Gifting for down payments has obviously become very significant and so it’s important to understand how gifting works. Here are the key things to know about gifting down payments in Canada:

1. Anyone can give money to whomever they want. However, if the gift is to be part of a downpayment, it must come from an immediate family member. This means parents, grandparents, or siblings. Lenders might accept a more distant relative as a giftor if there are special circumstances, but this is rare. Friends cannot gift down payments.
2. The giftor must provide a ‘gift letter’ to the lender. Each lender will have a pre-written gift letter template that the giftor will be required to use.
3. The lender doesnt usually require the giftor to disclose the details of their bank account or financial situation. They just need to see proof that the funds have been transferred to the homebuyer’s account.
4. The gift letter will make it clear that the money is a gift and doesn’t need to repaid. Any hint that the gift is a loan will seriously damage the mortgage application.
5. Timing is important. Lenders will usually want to see the gift in the homebuyer’s account at least 2 weeks before closing. However, the gift letter itself should be submitted no more than 90 days in advance.
6. There is no limit to the amount that can be gifted, and the gift is not taxable.
7. If the lender feels that the source of the gifted funds is questionable, they may ask for proof of where the money came from. This is especially true if the money is coming from overseas.
8. Gifted money cannot be used for closing costs such as land transfer tax, legal fees, home inspections, etc. Even if the gift covers 100% of the down payment, the homebuyer must be able to cover these costs out of their own pocket.