Gift Letters for a Mortgage Down Payment in Canada

First time home buyers in Canada have increasingly faced affordability challenges when looking to enter the housing market, including acquiring the necessary down payment. As home ownership is an important step for many young families, one option for financing their first home is to seek financial help from family members in the form of a gift.

This page takes a look at the purpose of a gift letter, why it is useful for financing first-time home purchases, how to properly prepare one, and how to avoid questions of fraud that may surround gift letters.

Gift letters and down payments

Many first-time home buyers in Canada may have generous family members who are willing to gift them money for the down payment on their first home. But how do banks and lenders view gift letters? From a bank’s point of view, it is important that they see that the gifted amount of money is in fact a gift and not a second mortgage on the property, nor a loan. This is where a properly prepared gift letter is important.

It is worth mentioning as well that while the most common situation where gift letters are written is a parent gifting money to their children, anyone can gift money to anyone.  It does not necessarily need to be a parent to child relationship.  For the sake of simplicity, however, this article will refer only to a parent-to-child gift or loan.

Understanding down payments for home purchases

If your loan exceeds a certain loan to value percentage, then you will be required to pay CMHC insurance or seek out other mortgage insurers. This insurance is in place to protect lenders in case you cannot make your monthly payments.

To avoid paying this insurance, a larger down payment is required. However, many first-time home buyers find it difficult to save this amount of money for their first home. One option for helping with this down payment is through family members who may provide funds in the form of a gift.

How do I write a gift letter?

For family members looking to gift money for a down payment on a house, know that mortgage lenders will rely on this gift letter to give them confidence that the money is not to be paid back and is not a loan of any kind. This helps the lender assess the risk of providing a mortgage to the applicant as a loan would indicate another financial burden on the home buyer, whereas a gift would not.

If you require a proper gift letter for money to be used for a down payment on a home, your bank will usually have a gift letter form that should be used.

When is gifted money not considered a gift?

The key component of a gift letter is that it lets the lender know that they money does not need to be paid back and will not form a financial burden on the recipient. It can be considered mortgage fraud if the gifted money is actually a loan since the purpose of the money is misrepresented.

This is why gift letters must explicitly state that the money is not a loan and the purpose of the gift is for the purchase of a home. Gift letters act as protection for the home buyer as well, in case the parents or relatives that gifted the money end up asking for the money to be paid back. In court, the gift recipient can then usually rely on the signed gift letter as proof that the money was a gift with no expectation or duty for it to be repaid.

Never sign a gift letter if you expect the money to be paid back

It is worth stressing the point that a gift is a gift, and a loan is a loan. Gift letters should never be signed and given to a bank or lender as a shortcut to purchasing a home when they are secretly only a loan that will be paid back. In this case, it would be considered fraud since the lenders rely on the gift letter as a financial indicator of the purchaser’s ability to not only buy the home, but handle their debts and payments going forward.

When looking to receive a gift for the purposes of purchasing a home, or when looking to provide a gift to a close relative for this purpose, always ensure both parties understand the terms of a gift and that the gift letter states this fact clearly. This helps to avoid any accusations of fraud and also, as mentioned above, any complications from legal actions that may occur down the road should the donor of the gift look to get paid back.

Taking a second mortgage

For parents who are looking to loan funds to their children for the purposes of purchasing a home, it is often advisable, with the written consent of the first mortgagee, to register a second mortgage on the property.

If parents expect to be paid back, the money they gave can be secured by such a second mortgage so that if the children cannot make their payments and the property must be sold, the parents may be able to recover some or all of the money.

If you are buying a home and will be requiring a gift letter for the funds to make your down payment, or if you have questions about buying your first home, please contact the real estate lawyers at Merovitz Potechin LLP.

Noah Potechin is a real estate lawyer with Merovitz Potechin LLP. Noah’s practice focuses on residential real estate and mortgage enforcement.