Gifting or Loaning Funds to Family for a Down Payment

What you and your family need to know about giving and receiving funds for real estate transactions in Ontario

First thing I get asked when people find out I’m a Realtor: “How’s the market? Still crazy?”

The second thing I get asked: “How are people able to become new homeowners in this market?”

As home prices rise rapidly, homebuyers struggle to afford down payments. So how are those who are buying doing it? Well, in Canada in 2022, over 30% of first-time buyers are receiving gifts from their parents or other family members. And almost 10% of move-up buyers are also receiving gifts!

Whether it’s because their family wants to see the next generation enjoy their inheritance or simply to avoid future taxes, this generational transfer of wealth is happening.

The average gift size for a home purchase is now $82,000 according to a report published by CIBC in October 2021.

And the above doesn’t factor in those whose family is providing interest-free or low-interest loans.

If you’re a buyer on a tight budget, your family may be able or willing to help you with your down payment. If that’s the case, lucky you!  

There are pros and cons to accepting the assistance, and it’s important to be informed as you move forward.

If coming up with a down payment or qualifying for a lower interest rate is going to delay your dream of homeownership, this is especially important.

If you have willing family members who have the finances or who may want to see you enjoy your inheritance now, then it’s worth the time to see if this is a viable financial option for you (and them).

The big question is whether it will be a gift or a loan.

In Canada, a gift is tax-free!

A gift is just that, a present with no strings attached. It’s not a loan and not considered income for tax purposes. And you do not have to pay anyone back. Ever.

In Canada, there is no gift tax for gifts of cash. Note that gifts of property have different rules, so check with your accountant or tax professional.

If you receive a gift, a lender may want the buyer to prove the origin of this new lump sum of money, and may want a letter assuring them that you are under no obligation to pay back this gift.

Can a family member loan money for a home purchase?

Your family member may offer you a lower interest or interest-free loan. Be sure to have it well-documented, no matter how close you are to the lender. As the saying goes, good paper makes for good relationships. And if your lender is collecting interest, they must remember to claim that when they file their taxes.

The implications of accepting family money

The implications for accepting a gift or loan from a relative are as wide-ranging as the difference between families. While a gift from one parent may come with no strings attached, another may come with all kinds of obvious (or initially invisible) drawbacks. 

As with every decision, it’s important to weigh the risks and rewards. If you would like someone to help guide you through the process of purchasing a new home, including balancing risk and reward, please send me an email at Liisa@LiisaVexler.com. I’m here for you!

Sample gift letter for mortgage lender:

[DATE]

To whom it may concern,

I, [YOUR NAME], hereby certify that I have given a gift of $5,000 to [PURCHASER’S NAME], my [YOUR RELATIONSHIP], eg. daughter], on [DATE] to be applied toward the purchase of the property at [PROPERTY ADDRESS].

I certify that this payment is a gift and that there is no obligation, either expressed or implied, of repayment. No part of this gift was provided by a third party with an interest in buying the property, including the seller, real estate agent and/or broker.

I have given the gift from the account listed below, and have attached documentation to confirm that the money was received by the applicant.

The source of this gift is:

[Type of account]

[Name of financial institution]

Sincerely,

[YOUR NAME]

[YOUR SIGNATURE]

[YOUR ADDRESS]

[YOUR PHONE NUMBER]