What is a Mortgage Gift Letter?

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If your parents (or someone else) are going to help you with your home down payment, you’ll want to know what is a mortgage gift letter. This is a vital document that’s required when you get a mortgage. Without one, you might not be able to close on your home, which could be a huge problem. Fortunately, getting a mortgage down payment gift letter is easy and will have no real consequences for you or the person giving you the funds.

What is a mortgage gift letter?

A mortgage gift letter is a document provided by the person that’s gifting money to a home buyer for the purpose of a down payment. The key point of this letter is to provide proof that the funds being given are indeed a gift and there’s no expectation of repayment.

Generally speaking, a mortgage gift letter is only used for first-time homebuyers, but there’s technically nothing stopping people from providing it for other properties. 

Note that a mortgage gift letter is usually only required if you’re being given at least $5,000 and the funds were deposited into your bank account within the last 90 days before you applied for a mortgage. That’s because lenders are required to ask you about any large deposits for anti-money laundering purposes.

In addition, the mortgage down payment gift letter is important because lenders want to ensure that you don’t need to pay that money back to your family member or someone else. If the funds provided were actually a loan and not a gift, it could affect your ability to make your monthly mortgage payments. Obviously, lenders are looking out for their own best interest, that’s why a mortgage gift letter is required.

To be clear, you can’t borrow funds from someone such as the seller, mortgage lenders, real estate agents, builders or close friends as down payment and then get a mortgage gift letter if you need to pay the funds back. If the money needs to be repaid, you can’t get a mortgage gift letter for the transaction.

Who can gift you a down payment?

Technically speaking, anyone can provide mortgage down payment funds. That said, a mortgage gift letter looks less suspicious if the money is coming from your immediate relative. That would include your parents, siblings, grandparents, cousin, aunt, spouse, fiancée, Godparents, niece, nephew, etc. 

Where the money comes from doesn’t matter. For example, if you have family living overseas, and they’re transferring you the funds, that’s fine. However, how the funds were acquired is relevant. You can only be gifted money that came from the donor’s personal finances. Again, lenders just want to make sure there’s nothing suspicious going on.

Why is a mortgage gift letter necessary?

The main purpose of the mortgage gift letter is to ensure that the money being used isn’t due to fraudulent activity. Financial transactions of $10,000 or more must be reported to FINTRAC to ensure the funds are legit. This is a normal procedure and part of their guidelines. This would apply to any transaction over $10,000 that appears on your bank statements.

From the borrower’s perspective, a mortgage gift letter is necessary if the gift funds are being used to buy a home. Without the money from the gift giver, the home buyer may not have the income ratio to secure a mortgage on their own. 

It doesn’t matter if the home buyer is getting a conventional loan or a high ratio loan, the mortgage underwriter just wants to ensure that they can afford to make their mortgage payments.

Is the mortgage down payment gift taxable?

There is no gift tax in Canada. It doesn’t matter if you’re being gifted $5,000 or $50,000, that amount is completely tax-free if you’re on the receiving end.

Keep in mind that the person making the gift may be taxed. For example, let’s say that your parents are giving you $20,000. They’re going to get that money by selling $20,000 of their investments. Well, if those investments had any capital gains, they would pay taxes on that amount.

Mortgage gift letter template 

Some financial institutions have a mortgage gift letter templates, but you can also create your own. The mortgage gift letter should include the following:

  • The name of the recipient
  • The donor’s name and contact information
  • Donor’s relationship with the recipient
  • The exact dollar amount of the gift
  • Where the funds are coming from
  • A statement saying that the funds are a gift and there is no expectation for it to be paid back
  • The date the funds were deposited
  • The gifter’s signature

Here’s a more specific mortgage down payment gift letter that you can edit for your own purposes:

[Today’s date]

To whom it may concern,

I, John Doe, declare that I have given James Doe, my son, $XXX, on [date] for the purpose of down payment and closing costs for his primary residence located at [address of the property]. This is not for an investment property or second homes. As this is a gift, I do not expect these funds to be paid back. The funds for this gift came from my personal bank account.

Sincerely,

[Signature]

John Doe

Address
Phone Number

What is the minimum down payment in Canada?

To buy a home in Canada, you need to have a down payment. The minimum down payment you need depends on the purchase price of the home.

  • Purchase price of $500,000 or less – 5% down payment required
  • Purchase price of $$500,000 to $999,999 – 5% down payment required for the first $500,000, 10% for any amount above.
  • Purchase price of $1,000,000 or more – 20% down payment required

As you can see, the higher the purchase price, the greater the down payment that you need.

Most people get their down payment from their own funds, but if you’re being gifted a sum, you can add it. It’s worth noting that there is no limit to mortgage down payment gifts

It’s also worth mentioning that if your down payment is less than 20%, you would be required to get mortgage insurance. This premium would be added to your mortgage to protect your lender in case you default.

What is a Mortgage Gift Letter?

About Barry Choi

Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog Money We Have is one of Canada’s most trusted sources when it comes to money and travel. You can find him on Twitter:@barrychoi

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