What Are Gifted Down Payments and How Do They Work?

In 2023, the average price of a home in Toronto $1,134,781, per data from TRREB.

With average home prices on a steady incline, it’s not surprising that Canadians are struggling to come up with the funds required for their down payments. As a result, we are seeing more homebuyers than ever benefitting from gifted down payments from relatives to provide some financial relief and in many cases, make their entry into home ownership possible. The experts at Royal LePage Your Community Realty have put together a few popular FAQ’s on the topic to help bring you up to speed on this trending topic. 

What are gifted down payments and how do they work?

In basic terms, a gifted down payment is a monetary gift to a homebuyer for use as a down payment. This is a financial gift most often offered by immediate family members to support relatives who are first-time-buyers. 

Affordability concerns have always represented a major factor for homeseekers, and first-time home buyers in particular, who can struggle to obtain the funds necessary for their down payments. For many first-time homebuyers, it’s the financial relief of these gifted down payments which make it possible for them to achieve home ownership. As the purchasing power has gone down in recent years, prices have continued to rise, and this disconnect has accounted for an understandable amount of added financial worry for first-time buyers. 

Fortunately, for those with the option available to them, hopeful home owners are able to benefit from the financial assistance of a gifted down payment in order to achieve home ownership. 

In a 2021 report by CIBC, the data showed that 30% of first-time home buyers had benefited from gifted down payments in the year before. The data also revealed that two-thirds of first-time buyers’ down payment was covered almost entirely through their gifted down payments. 

Who can gift money?

When it comes to gifted down payments, they are most often offered by an immediate family member. There are circumstances where extended family members such as aunts, uncles, siblings and grandparents may be the ones providing the gifted down payment, but this is less common. Further, gifted down payments from friends or romantic partners are usually not considered acceptable to lenders, as the feeling is that gifts of this nature are most secure when they come from immediate family. 

There are circumstances where lenders will agree to gifted down payments from non-immediate family, but that will depend entirely on your lender and your ability to supply proof of your relationship to the relative in question. 

How much can I give?

Buyers will usually opt to put in 20% for a down payment on their homes, but when it comes to gifted down payments, the amount being gifted can be any amount. It is important to note, if the home buyer(s) are self-employed, they will need to be paying 5% of the down payment themselves. So in that scenario, the gifted down payment cannot account for the whole of the down payment for the home. 

How is it taxed?

In Canada, there is no tax on gifted down payments. 

A gift is not a loan

A gifted down payment is a gift with no loan conditions or expectations of repayment. In Canada, this is declared via a mortgage gift letter, which accompanies the mortgage loan. The purpose of the letter is to officially declare that the down payment funds are being provided in the form of a gift. The letter must be signed by the benefactor in question as it will indicate who is supplying the gift and for what property, their relationship to you, how much they are giving and their personal contact information. All of this is to establish that the gifted down payment is in fact a gift, with no monies expected in return and under no conditions that would qualify it as a loan of any kind. 

Considerations before gifting

As with any financial gesture, either as the receiver or the gifter, there are some things that you should consider prior to committing to a gifted down payment or agreeing to be the recipient of a gifted down payment. 

• Have you been fully transparent with the family member that you intend to gift the monies to or receive the money from? In matters amongst family pertaining to financial decisions in particular, it’s crucial that frank discussions are had between yourself and the other family member to ensure transparency across the board prior to gifting or accepting such a significant financial gesture. 
• If the family member offering to provide a gifted down payment is not part of your immediate family, this is something you will need to clear with your mortgage lender, who may or may not be comfortable with a gifted down payment from an extended family member.
• Proof of funds may be required from your mortgage lender, who may ask to see confirmation of the source of the gifted funds for the down payment. This is not always the case, but it’s important to be aware that this might come up as a requirement of your lender in an effort to verify the identity of the individual gifting the down payment funds. This allows for transparency across the board and gives your lender some reassurance as to where the money is coming from. 

Curious to know more about trending topics like this and the many communities that Your Community Realty serves? Check out our Community Information page for more information and active local property listings today! Our award-winning team will be happy to supply you with information on up-and-coming residential projects like the ones mentioned above - and more! Don’t be the last to know - let Your Community Realty keep you ahead of the game. 

Stay ahead by signing up for our new listings notifications today!