Nowadays, working hard, hustling, and saving aren’t enough: increasingly, the one reliable ticket to home ownership is generational wealth, wrapped in a down-payment gift from mom and dad, sibling, or grandparents.

The number of Canadian millennials wanting to buy a house is on the rise but so are the costs of homes.

Young working professionals seek to build their careers and life in the bigger metropolitan cities of Canada. Toronto, Vancouver, Montreal and Atlantic Canada are endowed with work opportunities. But, saving down payment to buy a house in these cities is a challenge by itself.

Here, we talk more about what you should know about gifted down payments!

First, I'd like to mention that there is a government program called The First Time Home Buyer's Incentive where the government can potentially give you up to 10% in additional funds for your down payment. Visit the First Time Home Buyer's Incentive website to learn more.

We also recommend that you speak to a qualified mortgage agent at Tangerine.ca

A few lucky first-time homebuyers leverage a gifted down payment to help buy their first home. A gifted down payment usually comes from a family member by helping pay either a portion of the entire down payment as a gift. In most cases, lenders will require that the gifted funds come from an immediate family member like parent, sibling or even a grandparent.

How do gifted down payments help?

As a first-time homebuyer, it would be prudent to understand all about down payments and mortgages before you actually apply for it. Gifted down payments can be a major relief to you if you don’t have the necessary money to settle the entire down payment.

In Canada, you can typically buy your first home by paying 5% down. However, it is advisable to put as much as you can without “breaking the bank”. Because, when you pay less than 20%, you are obliged to purchase mortgage insurance. Let’s say if you can pay 5% of the down payment, and your parents gift you the remaining 15%, your total is 20% and now your monthly mortgage is lower, and you save on the necessary mortgage default insurance.

Remember, it’s a gift, not a loan

Gifted funds mean that you are not obligated to repay the person gifting you the money. Your lending will most likely require a Gift Letter that both you and the person gifting the money signs that states that you both understand it’s a gift and not a loan. It’s an important distinction that proves that you do not have any other debt obligations when applying for a mortgage. The letter would state their relationship, the amount gifted, the donor’s contact details and the property being purchased.

Proof of source of funds

Sometimes, lenders may require proof of the source of funds from the person gifting the funds. This is not applicable in all cases, but it provides the lender with another form of verification. This proves that the money did come from the person you said it did. You may face issues when accepting international funds to use as your gifted down payment. Therefore, it’s important to have your documents in order. Your mortgage broker will let you know exactly what you need!