When you’re buying a home, you may receive a monetary gift from a family member to help make a larger down payment. But your mortgage lender will usually want proof that the newfound funds are a gift and not a loan. In that case, the lender will want a mortgage gift letter.
What is a mortgage gift letter?
A mortgage gift letter is a form from your donor stating that the funds for your down payment are a donation and you’re not required to pay the money back.
In fact, more first-time homebuyers are getting a little assistance from their family to help buy their first home. Between 2015 and 2019, 40% of first-time buyers received a monetary gift from their parents or other family members to help buy a home, according to a Mortgage Professionals Canada survey.
That number has continued to trend higher over the years. Thirty percent of first-time buyers who bought between 2010 and 2014 received funds as a gift from their family to help with their down payment. Similarly, 24% of those who purchased between 2005 and 2009 can say the same.
When and why do you need a mortgage gift letter?
Your lender will require this because they want to know where the source of your down payment is coming from. This is to ensure the money is actually a gift and that you’re not taking on additional debt.
If the money is a loan, the lender may not allow it to be borrowed for a down payment. That’s because it would add to the borrower’s debt obligations, and in turn, could reduce the maximum mortgage size the lender would approve. That’s why it’s recommended you have no additional debts when you get a mortgage. It will allow you to focus on paying your mortgage and not have to worry about paying any other creditors.
Who can you receive a mortgage gift from?
Most lenders will require that the funds you receive come from an immediate family member, such as a parent, sibling or grandparent. That means your third cousin, a friend, or a manager can’t provide you with a mortgage gift letter.
However, some lenders might allow you to receive a gift letter from someone who isn’t an immediate family member. You should confirm this with potential lenders if you will be relying on funds from someone who isn’t part of your immediate family.
When can’t you receive a mortgage gift?
Some lenders won’t allow a mortgage gift in the following circumstances:
- The property is for investment purposes and not a primary residence
- You’ve declared bankruptcy in the past
- The funds are from someone who doesn’t live in Canada
- Your income can’t be proven, which is sometimes the case for those who are self-employed
- You want a readvanceable mortgage, such as a home equity line of credit (HELOC)
What does it need to include?
A mortgage gift letter needs to include certain details and prove to the lender that it’s not a loan. The letter should provide the following information:
- The name of the gift giver, their address and their phone number
- The name of the recipient
- The relationship between the donor and the recipient
- The amount being gifted
- A statement noting that the gift doesn’t need to be paid back
- The address of the property the recipient is purchasing
- The date (it should be no more than 30 to 90 days old; this will be dependent upon your lender’s policy)
When you get a gift to help with your down payment, the cheque shouldn’t be deposited as soon as it’s received. Your lender will want a copy of the cheque that shows the amount and proof that the money was deposited into your account. This means you shouldn’t deposit the cheque together with additional items when you’re making this transaction. The gift must also be deposited into your account and not given to your realtor or lawyer.
Some lenders may also ask for proof that the funds came out of the donor’s account, such as a bank statement. Ensure that the person giving you this gift is aware that they may be required to provide this proof.
Is the money taxed?
Canada doesn’t have a gift tax, so the money you receive from a family member isn’t taxed. However, if you put the money into a high-interest savings account before the property purchase closes and you earn interest income, you will only be taxed on the interest.
How does a monetary gift help?
Receiving a monetary gift to help buy a property can allow you to get into the real estate market sooner than you might have been able to otherwise. This is particularly true in an environment of rising home prices. It can also save you thousands of dollars in interest payments and reduce your monthly expenses.
Let’s assume you’re buying a $400,000 property, and you’ve managed to save $80,000 for a down payment. Using Ratesupermarket.ca’s mortgage payment calculator, you’ll have a monthly mortgage payment of $1,354 if you have a 5-year fixed rate of 1.99% and a 25-year amortization period. At the end of five years, you’ll have paid $29,218.29 in interest and your mortgage balance will be $268,008.27.
However, if you receive a $50,000 gift from your parents, you can put down $130,000 and get a $270,000 mortgage instead. Assuming you get the same rate and amortization period, your monthly mortgage payment will drop to $1,142. After five years, you’ll pay $24,652.92 in interest and your mortgage balance will be $226,131.98.
That $50,000 gift makes a big difference. Your monthly mortgage payment will be $212 less every month, you’ll pay $4,565.37 less in interest over five years, and your mortgage balance will be $41,876.29 lower.
A final note
If you’re fortunate enough to receive a monetary gift to help buy a home, make sure you get a mortgage gift letter and that it meets the lender’s requirements. The savings from making a larger down payment can provide more breathing room in terms of your monthly budget, or the money could go towards saving for retirement or building an emergency fund. It will also significantly reduce the amount of interest you’ll have to pay over the lifetime of your mortgage.