The pros and cons of tapping the parental ATM for a down payment

Houses for sale in Ottawa

Robert McLister: Getting help from family is common for first-time homebuyers, but doing it wrong can cost you

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A jump in housing market activity this winter has some, including economists at Royal Bank of Canada, asking whether the end of Canada’s housing correction is finally at hand.

That will no doubt ratchet up the sense of urgency for prospective home shoppers, especially young buyers who see the writing on the wall: not enough homes, high immigration, rising incomes and falling rates — all historically jet fuel for property prices.

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Even with Canada flirting with a recession, qualified aspiring homebuyers will have to wonder whether they can afford to gamble that home values won’t be higher 12 months from now.

But what if your piggy bank’s running low on down payment funds? How do you get on the housing ladder then?

One option is to have generous relatives. Almost three in 10 first-time buyers milk their families for down payment assistance, according to past research from the Canadian Imperial Bank of Commerce.

Assuming you have no other source of down payment, a family contribution has five potential upsides.

Interest savings: The bigger your down payment, the smaller your mortgage and the less interest you pay.

Buying power: A fatter down payment helps people afford more home.

Default insurance savings: If family assistance helps you put down 20 per cent, you can kiss goodbye the default insurance fees. On a $500,000 home, that’s up to $20,710 saved — or more if you roll the insurance into the mortgage.

Purchase price savings: If family assistance helps you buy ahead of price increases, you could save tens of thousands of dollars. Consider that home values increase an average of 5.78 per cent over 12-month periods, according to the last 43 years of national price data from the Canadian Real Estate Association. It has ranged from a 42 per cent 12-month gain to a 19 per cent 12-month loss. If prices climb by even an average amount while you’re waiting to amass a down payment the old-fashioned way — by saving — it could cost you $28,900 of lost appreciation on a $500,000 property in just one year, less any savings from renting. That’s more than most can save in a year.

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More certain approval: Let’s say your debt ratios are right below the lender maximums, and you decide to delay buying for a year. If prices rise that average 5.78 per cent, it could boost your debt ratios above lender limits. The result: you might not qualify anymore, or you might have to pay a lot more for a non-prime mortgage.

Let’s say you decide to squeeze your family for a down payment. What happens if they give you the money on the condition they get it back?

Well, then, it’s not a gift. It’s a loan, and all mainstream lenders require that down payment loans be disclosed.

Most lenders are cool with gifted down payments. Loans, on the flip side, come with a tighter leash.

Opt for a default-insured mortgage through Sagen or Canada Guaranty and down payment loans are acceptable. The insurance premium is a half-percentage point higher than normal, but that’s not a big deal.

The catch is that lenders assume a monthly payment on unsecured down payment loans — typically three per cent of the loan amount — even if your family doesn’t ask for payments. This hikes your debt-to-income ratio, reducing your maximum mortgage amount.

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To get around this limitation, or to satisfy a family member who wants their money back, some borrowers fib and tell their broker/lender that lent funds are a “gift.”

Others deposit family funds in their bank account three months before applying for the mortgage, then pass it off as personal savings. (Lenders ask for one to three months of statements to document where your down payment money came from.)

Steer clear of these no-noes. Not only is misrepresenting a down payment fraud, but if you get busted, the lender can theoretically call the mortgage and take other unpleasant actions.

Undisclosed down payment loans create a financial burden on a homebuyer, creating risk for both the borrower and lender, though the degree of risk is debatable.

“I wouldn’t be surprised if a lot of people who get down payment gifts are secretly paying back their parents,” says the founder and chief executive of True North Mortgage and Think Financial, Dan Eisner. “As a lender, we don’t see this as a critical risk.”

“Even if the parent secretly registers a second mortgage after closing (to protect their down payment loan), what are the odds the parents will foreclose on their kid?” he asks.

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“If anything, it demonstrates the borrower has a backup plan if things go sideways. If a parent gave them a $40,000 gift, the borrower can probably go back to that parent if they need help making their mortgage payments.”

More on down payment gifts and loans

If you’re eyeing a family-funded leap onto the property ladder, remember these seven things.

1. When it comes to “gifts,” borrowers and family gift-givers must typically sign the lender’s gift letter. This attests that the down payment funds are non-repayable.

2. For conventional mortgages, most lenders require down payments to come from a parent, grandparent, child or sibling. If you’re taking funds from your third cousin twice removed, consult a mortgage broker for options.

3. If your familial financier frets their generous down payment might get divvied up in a love-gone-wrong breakup, chat with a lawyer. They can draw up cohabitation agreements or marriage contracts to dictate where the down payment money goes in a separation.

4. If needed, a broker can recommend uninsured lenders that allow your kin to register a second mortgage on the property. This ensures the down payment loan is repaid if the property is sold. The second mortgage can be interest-bearing or non-interest-bearing, with payments or without.

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5. Most lenders don’t allow gifted down payments on uninsured second homes or non-owner-occupied rental properties, but brokers know the exceptions.

6. Family members sometimes opt to go on title (take one per cent ownership, for example). That way, their down payment funds are not viewed as a gift. But note, this makes the family giftor responsible for the mortgage if the other buyers default.

7. Some lenders have a policy against allowing gifts from family members in certain countries, like China or India.

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In a nutshell, summoning the family treasury for your down payment can mean big bucks saved and an easier mortgage approval. Just be sure to navigate loan versus gift distinctions carefully. Otherwise, you may waltz into a minefield of fiscal stress.

Robert McLister is a mortgage strategist, interest rate analyst and editor of You can follow him on X at @RobMcLister.

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