As Canadian home prices remain stubbornly high, more first-time buyers are turning to their parents for help with a down payment. According to recent data, nearly one in three first-time homebuyers in Canada receives financial support from family.
While this kind of support can be a crucial stepping stone toward home ownership, it comes with significant legal, financial, and emotional considerations. Whether you’re a young buyer seeking help—or a parent willing to lend a hand—here are six important factors to weigh before dipping into the “Bank of Mom and Dad.”
1. Clarify: Is It a Gift or a Loan?
Before any money changes hands, both parties must agree on whether the funds are a gift or a loan.
- If it’s a gift, consider drafting a gift deed or letter confirming the nature of the transfer.
- If it’s a loan, create a written loan agreement that outlines the terms of repayment, interest (if any), and expectations.
- Be transparent with your mortgage lender—gift letters are often required, and loans may affect your eligibility.
Failing to document intentions clearly can lead to legal disputes or unintended financial consequences, especially if the home is later sold or the child’s relationship breaks down.
2. Understand the Tax Implications
Canada currently has no gift tax, but that doesn’t mean you’re in the clear from a tax perspective.
- If interest is charged on a family loan, the lender (e.g., Mom or Dad) must report it as taxable income.
- For the borrower, mortgage interest on a family loan is not tax-deductible unless the home is used to generate business or rental income.
We recommend speaking with a Koroll & Company accountant or tax advisor before finalizing any agreement, especially if interest is involved.
3. Assess Long-Term Affordability
Parental support can make mortgage approval easier—but it may also mask the true cost of homeownership.
- A larger down payment may improve your mortgage terms, but it doesn’t guarantee you can afford the ongoing monthly payments.
- Work with a financial planner to ensure you can maintain the mortgage, property taxes, insurance, and other costs—even if your circumstances change.
The goal is to enter homeownership sustainably—not just to "get in the door."
4. Manage Family Dynamics Openly
Money can strain even the strongest family relationships.
- Gifts or loans may lead to tensions among siblings, especially if support is not distributed evenly.
- Be open and communicate expectations clearly to avoid misunderstandings or future disputes.
- Involve all relevant family members early in the discussion, particularly if the support is intended as part of an early inheritance.
Legal and financial transparency can protect both relationships and your estate plan.
5. Weigh the Pros and Cons
Here’s a quick breakdown of the potential advantages and drawbacks of borrowing from family:
Pros
✅ Easier to qualify for a mortgage
✅ Potential for lower (or no) interest
✅ Keeps interest payments within the family
Cons
❌ May lead to strained family dynamics
❌ Risk of overextending the buyer financially
❌ Could jeopardize parents’ retirement security
Parents: Before giving or lending, ensure you’re not sacrificing your own financial well-being. Using a HELOC or taking on a reverse mortgage to help children can put your retirement at risk if not carefully planned.
6. Explore Alternatives to Parental Support
If family support isn’t available—or you’d prefer to go it alone—consider these alternative strategies for first-time buyers in Canada:
- First Home Savings Account (FHSA): Save up to $8,000/year tax-free (up to $40,000 lifetime).
- RRSP Home Buyers’ Plan (HBP): As of April 2024, you can now withdraw up to $60,000 from your RRSP for a down payment.
- Government Incentives: Look into CMHC programs, GST/HST housing rebates, and regional first-time buyer grants.
These tools can complement family support—or serve as an independent pathway to homeownership.
Final Thoughts: A Plan Protects Everyone
The Bank of Mom and Dad can be a powerful ally in helping young Canadians step onto the property ladder—but only with proper planning. Clearly defining whether the funds are a gift or a loan, documenting agreements, and considering both tax and emotional implications will protect everyone involved.
Koroll & Company is an accounting firm located in Newmarket, Ontario.
We provide a full range of services including accounting, taxation, auditing, and business advisory. Our clients represent a broad cross-section of small to large owner-managed businesses and not-for-profit organizations.
