Can You Use a Monetary Gift As A Down Payment In Toronto?
Home prices in Toronto and surrounding areas continue to soar, making it increasingly challenging to come up with a sizable down payment to take out a mortgage.
That's why many homebuyers are looking to their family for financial assistance. More specifically, many parents are offering to help out their grown children using a monetary gift to be used as a down payment.
So, how do down payment gifts work? And are they even allowed?
Down Payment Requirements Increase With Higher Home Prices
According to the Toronto Regional Real Estate Board's (TREBB) recent Market Watch report from June 2023, the average selling price in the Greater Toronto Area (GTA) is higher this year compared to last. Right now, the average selling price is $1,182,120, marking a 3.2% from the same time in 2022.
The down payment requirement to take out a mortgage to finance a home at this price point can be substantial, depending on how much you need to borrow. Let's take a look at a few examples of how much of a down payment you would need to take out a mortgage to buy a home for this price:
7% down payment: $82,748
10% down payment: $118,212
20% down payment: $236,424
If you want to avoid paying mortgage default insurance on your home loan, you'll need to make a down payment of at least 20%. In this case, that means you would need to come up with $236,424. That's a lot of money to save up, which is why many homebuyers often look to family for some financial help.
How Does a Gifted Down Payment Work?
Since the down payment is a gift, it is not taxable. You can use it for any purpose, including as a down payment. However, there may be some rules that you must follow.
For instance, many banks require that the money come from an immediate family member. That's because the lender will want to be certain that the funds are a gift, and are not being loaned.
The person giving the gift must be freely offering you the money with no stipulations that the funds must be repaid. Otherwise, this is not considered an actual gift.
If the lender suspects that you must repay the gift, along with interest, you may be considered to be at a higher risk for loan default. That's because you would technically be in debt for both the mortgage that the lender extends to you and the gifted down payment.
Some lenders may even require some form of proof that the money is truly a gift. For instance, the person giving you the funds may need to accompany the money with a letter stating explicitly that the funds are being gifted with no expectation of repayment. You may also need to provide a bank statement showing the transfer of the funds.
Monetary gifts from immediate family members are usually not an issue. However, it can be more problematic when the funds are coming from overseas. Your lender will just want to make sure everything is all good before they accept your down payment gift to be put toward your home purchase.