6 things to consider before borrowing from the Bank of Mom and Dad for your first home

Before locking into a familial loan, both parties must assess whether they are on the same page and are in a position to take on this type of agreement—along with knowing the power and relationship dynamics that could come with it. Here are six key considerations when borrowing from the Bank of Mom and Dad for your first home.

1. Is it a gift or is it a loan?

Determine if the financial help you’re discussing with your family is a gift or a loan. “Make sure there’s good communication with regard to the parent and the child about the nature of this,” explains Nicholas Hui, P.Eng, CFP,  an advice-only Financial Planner at VAVE Financial Planning. “Is it a gift, or is it a loan? If it’s a gift, then I highly recommend having a ‘gift deed.’ A loan could be set up with some type of contract with payment terms and then seek legal advice to make it rock solid.” (More on gift deeds in a sec.)

If it’s a gift

If your parents gifted you money toward the down payment for your home purchase, then your mortgage lender may need proof of a gift deed or gift letter. In Canada, a gift deed is a legal document that transfers ownership of a property or asset from one party to another without exchanging money. This document confirms that the down payment amount from your parents is truly a gift and not a loan, which helps your lender verify the source—and nature—of the funds.

Hui also suggests discussing with your family whether it’s part of an early inheritance and, if not, whether other siblings should be informed to prevent future miscommunication over the division of assets, especially after your parents pass away.

If it’s a loan

If you’re considering a loan from a family member, discuss interest. If your parents decide to charge interest, it’s not necessarily a bad thing. For one, it could be beneficial to keep those funds “in the family” and support the Bank of Mom and Dad instead of a financial institution or mortgage company. And you’ll likely benefit, too, if the agreed-upon interest rate is less than prime. 

Hui says parents could consider using the prime rate of Canada as a guideline (currently 6.95%) and then go a little lower or higher than that—but he says it’ll depend on the dynamics, loan amount and other factors. 

Whether interest will be charged or not, Hui suggests having all aspects of the agreement—repayment timeline and terms of the loan—put in writing so everyone is on the same page.

2. Consider the tax implications 

While there’s currently no “gift tax” in Canada, there are some tax implications to be mindful of. Interest charged on a loan is taxable income, so your parents will need to know that. “Like any investment, they’re loaning money to their child. If you pay them ‘income’ for that loan, it’s taxable,” Hui says.