These days it feels like the only way to buy a home is to have someone give you some or all of the down payment.
And the rules around down payments in Canada are strict:
If you’ve been fortunate enough to be gifted with a down payment, your lender may have asked you to provide a mortgage gift letter.
It’s a document signed by the person gifting you the money that indicates they’re gifting you some or all of the down payment and you don’t have to pay it back, ever. That means parents can’t tap the equity in their home, give you the money as a loan, and expect you to pay them back in the future.
The letter goes to your mortgage lender — ideally as part of your mortgage pre-approval — and they may need to verify that the money has indeed been deposited in your bank account. They don’t need to see or access the bank accounts of the gifter, however.
The money and resulting gift letter must be from an immediate family member. So, think parents, siblings, or grandparents. Mortgage gift letters from a friend aren’t accepted in Canada.
The money must also come from the gifter’s personal finances, so a friend can’t give the money to your parents, who then give it to you. Lenders can check the gifting trail by asking to see a recent history of the gifter’s financial statements.
Nope! There is no gift tax in Canada so the money is free and clear and ready to be used for your down payment. If you later decide to use the gift for something else, that would be a conversation between you and the gifter.
There is no minimum or maximum amount that can be gifted but there are a couple of things to keep in mind.
Let’s say you’ve got the full 20% down payment. If you’re self-employed, you have to come up with 5% of the down payment on your own — it can’t be gifted. This shows you can handle the mortgage payments. The other 15% can be gifted, however. If you’re employed full-time, you can use the gift for the entire 20% down payment amount.
The gifter is responsible for writing the letter. Most lenders have a template for mortgage gift letters that you can download, fill out, sign and submit back to the lender. The letter should include:
Lenders consider a mortgage gift letter valid for 90 days. If the money was gifted more than 90 days ago, the lender may need another letter. That’s uncommon, though, because most down payments tend to happen during a short period of time, within 90 days.
While it’s nice to be gifted some or all of your down payment, the borrower still needs to be in good financial standing to receive a conventional mortgage (one that doesn’t require default insurance). That means having a good credit score and the ability to make mortgage payments.
Getting help with a down payment is a great thing but lenders want to make sure that the money is a gift and you can pay your mortgage. That does come with a little bit of paperwork, but it will make the process of securing a mortgage that much easier.