With home prices still on the
rise after the downturn in mid-2017, it’s getting harder and harder for first
time homebuyer’s to break into the market. Between the Bank of Canada upping the benchmark rate to 5.34%, the average home price up to $782,189, and the
median household income only being $70,336, there are a lot of reasons why the
Toronto and Vancouver areas are unaffordable for many.
Luckily, parents who have had years to accumulate wealth and equity may be willing to help out. Mortgage brokers are seeing an increase in both the number and amount of down payment gifts. With mortgage experts agreeing that the trend is likely to continue, you should be aware of the rules about getting down payments gifted.
Canada has no gift tax or lifetime gift exclusion like the US does. You can be gifted any amount of money at any time with no tax implications. Your parents can buy your whole house for you if they want.
However, there are minimum down payment rules in Canada. One of them is that you must have at least 5% of the purchase price as a down payment. 100% of the down payment can be gifted if you’re employed full-time, but if you’re self-employed you must contribute at least 5% of the down payment from your own funds.
Be careful though: while you can be gifted 100% of the down payment, you’d have to really impress the lender with the rest of your application. That means having an excellent credit score and good income.
This often appears in the mortgage contract as an “arm’s length” gift. Why does it have to be an immediate family member? Why can’t my generous friends help me?
Unfortunately those are just the rules that lenders in Canada follow. Perhaps they believe that, since you are immediate family, it is less likely that they will expect repayment.
It is possible in some cases to gift a down payment to a spouse, but that depends on the lender. In most cases, there must be an immediate link to you by blood, such as brother, sister, mother, father, or grandparent.
Many people ask if it’s possible to gift a down payment to their child, but to recoup their down payment when they sell the property.
That’s not a gift.
Others may ask if it’s possible to gift a down payment and have it be repaid, interest-free, over time.
That’s also not a gift.
When giving a gift, lenders require the gifter to provide a written letter stating that there is no expectation of ever receiving any money back. If you plan on asking for a stake in the property, implicitly or explicitly, that means you are not giving a gift – you’re making an investment. If you plan on having them pay you back the money over that, that’s a loan.
In fact, giving a loan for a down payment may negatively affect the borrower’s mortgage approval, as that debt increases their total debt service ratio (TDS). The higher the TDS, the harder it is to get approved for a mortgage.
You can’t skirt the immediate family requirement by having your friend give your parents money that they would give to you. The lender may ask for a history of the funds to confirm where they came from. This will usually be in the form of bank statements dating back a couple months.
While the funds must come from the gifter’s own finances, it’s possible for it to be borrowed funds. If your parents have a lot of money stored in their house as equity, they can take out a home equity line of credit or second mortgage and gift the funds to you. They’ll have to pay it back themselves – they can’t ask you to help repay – but it won’t be a problem to gift it.
Gifting a down payment is a great way to give your children or siblings a head start on their home ownership plans. If they’re trying to decide between buying and renting, it can help give them the boost they need to get into a home. They’ll also spend less in interest charges on their mortgage and reduce their CMHC insurance premiums!