6 Things to Know Before Borrowing From the Bank of Mom and Dad

As housing becomes increasingly unaffordable for many Canadians, a growing number of young adults are turning to the “Bank of Mom and Dad” for help with down payments or mortgage payments. A recent CIBC survey found that 31% of first-time home buyers in Canada received financial help from a parent or relative, with the average gift around $115,000. While parental assistance can make a significant difference, borrowing from family carries both financial and relational implications that deserve careful thought.

Before entering a familial loan or gift agreement, both parties should be clear about their expectations and financial capacity. Understand the dynamics that money can introduce into a family and document terms to reduce future misunderstandings. Below are six key considerations for first-time buyers relying on parental help.

1. Is it a gift or a loan?

The first and most important question is whether the funds are a gift or a loan. Clear communication is essential. If it’s a gift, get a gift deed or gift letter in writing so your mortgage lender can verify the funds are not a loan. In Canada, a gift deed documents that money or property is transferred without repayment expectations, which lenders often require as proof of the source and nature of the down payment.

If the money is intended as a loan, the parties should agree on repayment terms and whether interest will be charged. A written contract detailing repayment schedule, interest rate, and consequences of missed payments helps make the arrangement legally sound and reduces potential conflict.

If it’s a gift

When parents provide a gift for a down payment, lenders commonly request a gift letter confirming the money does not need to be repaid. It’s also wise to discuss whether the funds are part of an early inheritance and whether other siblings should be informed to avoid future disputes over estate division.

If it’s a loan

Family loans can be attractive compared with institutional borrowing. Charging interest isn’t necessarily negative—if the rate is lower than what a bank would offer, everyone can benefit. Parents and children should consider using a common benchmark, such as the prime rate, to set a fair rate, then document the rate, term and repayment plan in writing.

2. Consider the tax implications

Canada does not have a formal gift tax, but there are tax consequences to consider. Interest earned on a loan is taxable income for the lender, so parents charging interest must report that income. For borrowers, interest on a personal loan used to buy a primary residence is generally not tax deductible unless the funds are used for income-producing activities, such as a rental property or business.

3. Consult a financial planner

Both parties should meet with their financial advisors before finalizing any arrangement. Parents need to be confident they can afford to lend or give money without compromising their retirement or financial security. Common ways parents raise funds include tapping a home equity line of credit (HELOC) or other borrowing, which can expose them to risk if their own finances are not solid.

Buyers should also plan realistically. Parental funds can inflate a borrower’s apparent affordability and help pass mortgage stress tests, but if a lender declines a mortgage because of insufficient income, parents should not be pressured into bridging the gap. Analyze cash flow for multiple scenarios—rate increases, job changes, adding children—so the purchase isn’t a financial trap.

4. Can a parental loan score you a better starter home?

Parental help can make it easier to qualify for a mortgage or allow you to buy a better starter home. However, lenders typically request disclosure of gifted funds and any loans from family members. Most lenders require some of the down payment to come from the borrower’s own savings and will want documentation proving gifted funds are not repayable loans that could affect mortgage repayment capacity.

Withholding information about family loans can have serious consequences. Always be transparent with your lender and weigh whether the property is affordable long-term rather than relying on temporary family support.

5. The pros and cons of borrowing from family

Below are common advantages and drawbacks when parents help with a mortgage down payment.

Documenting agreements in writing and considering the impacts on everyone’s long-term finances can help prevent misunderstandings or family conflict.

6. Your other options: Alternatives to the Bank of Mom and Dad

If you don’t have parental support, there are several strategies for first-time buyers in Canada. Consider saving through a first-home savings account (FHSA), taking advantage of government programs and rebates designed to help home buyers, or using the Home Buyer’s Plan to withdraw from registered retirement savings plans (RRSPs). Recent changes allow higher withdrawals for eligible buyers, which may help boost your down payment.

Other practical steps include improving your credit score, buying a more modest starter home to enter the market, researching more affordable neighbourhoods, and educating yourself about the home-buying process. Thoughtful planning and exploring alternatives can make home ownership achievable without compromising family relationships or long-term financial security.

Read more about first-time home buying:

• How to afford moving out as a student or young adult
• Renting vs. owning: Can you be financially secure without buying a home?
• Best FHSAs in Canada: Where to get the first home savings account
• How first-time home buyers can use an FHSA to save for a down payment