Turning Family Support into a Loan: A Smart Down Payment Strategy
Buying Sooner Without a Gifted Down Payment
Many buyers face the same challenge: saving for a down payment while home prices continue to climb. For some, parents or close family members step in with a non-repayable gift, often called an “early inheritance.” But that’s not always realistic. Parents may need those funds for their own retirement, have other financial commitments, or simply prefer to retain control over their savings.
Fortunately, there’s another path forward, one that’s completely acceptable to Canadian mortgage lenders. Instead of a gift, your parents can loan you the funds for a down payment. With the right legal documentation, this approach can be a win for everyone involved.
How a Family Loan Works
A family loan for a down payment is exactly what it sounds like, money borrowed from immediate family to be repaid over time. Unlike a gift, which never needs repayment, this loan is treated by lenders like any other personal debt. That means your repayment terms will be considered in your mortgage application.
The loan can be interest-free or carry an agreed-upon rate. You and your parents can decide whether the repayment schedule is monthly, annual, lump sum, or due when the home is sold. The flexibility makes this an attractive option for families who want to help but need to protect their own financial future.
The Advantages of a Family Loan
The biggest benefit is timing. In a market, where prices can move quickly, waiting years to save the full down payment can mean buying later at a much higher price. A family loan allows you to:
Enter the market sooner with minimum down instead of waiting to save more
Reach the 20% down payment threshold to avoid default insurance premiums
Borrow at friendlier terms than a private lender might offer
Keep the arrangement within the family, rather than taking on debt from a third party
What Lenders Need to See
Because a family loan is still debt, lenders need to account for it in your debt service ratios. This is why having a formal written agreement is essential. The contract should clearly outline:
The principal amount borrowed
The interest rate (if any)
The repayment schedule
The loan term
All parties’ signatures
Your lender will typically request a copy of this agreement and proof of the transfer of funds. Having these details ready ensures the process is smooth and transparent.
An Example in Practice
Imagine you have saved $50,000 but need $90,000 to reach 20% down on a $450,000 property. Your parents agree to lend you $40,000, interest-free, to be repaid over 12 years. The monthly repayment amount is calculated and factored into your mortgage qualification. With this arrangement, you avoid paying default insurance and secure a property now instead of waiting several more years.
Why It Can Be a Win-Win
For you, the advantage is obvious: you buy sooner, potentially save on default insurance, and avoid higher home prices in the future. For your parents, it means they retain control of their capital, earn interest if they choose, and still help you achieve homeownership.
In some cases, parents may also structure the loan to be repaid when you sell the property or refinance, reducing the pressure of monthly repayments. Every family’s needs are different, which is why flexibility is key.
Making It Official
The single most important step is putting everything in writing. Even though this is family, clear terms protect both sides. A lawyer can help prepare the agreement to ensure it meets legal and lender requirements.
Without a written contract, lenders cannot verify the source and structure of the loan, which could result in delays or even disqualification from mortgage approval.
The Importance of Professional Guidance
Before finalizing a family loan, it’s wise to speak with a mortgage professional. We can:
Review how the loan will impact your borrowing power
Ensure the agreement meets lender requirements
Help your family choose repayment terms that work for both sides
Provide realistic scenarios so everyone understands the long-term impact
In my experience, family loans work best when all parties are comfortable and informed. This often means holding a family meeting where I walk everyone through the numbers, answer questions, and ensure the agreement benefits everyone.
Final Thoughts
A family loan for a down payment is a creative, practical solution for many buyers. It allows you to move forward with your purchase, helps parents maintain financial stability, and keeps borrowing costs lower than many alternative options.
With proper documentation, lender approval, and open communication, this can be the perfect arrangement to bridge the gap between what you have saved and what you need to buy your home.
If you’re considering a family loan for your down payment, I’d be happy to review your situation, walk through the numbers, and help set you up for success.
Contact us today at 204-997-5021 or mcabral@204mortgages.com to learn more about how a family loan could help you enter the housing market sooner.
