Should You Pay Off Your Adult Child’s Mortgage and Become the Bank?

The “Bank of Mom and Dad” usually comes up when an adult child needs help with a down payment. But what if a parent has enough savings to pay off the child’s existing mortgage, then has the child repay the parent with interest?

That question recently came up on The Ramsey Show. An American caller wanted to use roughly all of her savings to clear her daughter’s mortgage, then collect $2,000 a month from her daughter. Her thinking was straightforward: if interest has to be paid, why should the bank receive it instead of the family?

The idea is not automatically unreasonable. In Canada, families can use private lending arrangements to help one generation reduce borrowing costs while allowing another generation to earn interest. But this is not something to arrange with a handshake, a spreadsheet and good intentions. Once a parent expects repayment, the relationship has changed. The parent is now a lender, the child is a borrower and the family home is part of a financial agreement.

First, Decide Whether This Is a Gift or a Loan

Before discussing interest rates, everyone must be honest about the purpose of the money.

A gift is money the parent does not expect to receive back. A loan creates a legal obligation to repay. Calling the money a gift while privately expecting repayment can create problems later, particularly if the child separates from a spouse, applies for future financing, sells the home or becomes involved in an estate dispute.

If the parent wants the money returned, treat it as a loan from the beginning. Do not leave the most important term unspoken.

Do Not Empty Your Own Safety Net

The first financial question is not whether the child can save interest. It is whether the parent can safely part with the money.

Using most or all available savings to pay off someone else’s mortgage can leave the parent exposed to medical costs, housing changes, home care, inflation and a longer retirement than anticipated. Monthly repayments from the child are not a substitute for accessible savings, especially if the child experiences illness, job loss, divorce or another disruption.

A parent considering this strategy should first establish how much must remain available for emergencies, retirement income and future care. A fee-only financial planner can model the long-term impact before the family makes a decision that feels generous today but creates dependence later.

Check the Existing Mortgage Before Paying It Off

Canadian mortgages may include prepayment privileges, limits and penalties. Paying out a closed mortgage before the end of its term can trigger a significant prepayment charge, along with discharge, legal or administrative costs.

Before moving money, request an official payout statement from the existing lender. It should confirm the exact balance, the payout date, applicable penalties and other discharge costs. Compare those expenses with the interest the family arrangement is expected to save. A good idea can become an expensive one if the existing mortgage is broken without doing the math.

The Financial Consumer Agency of Canada provides guidance on the costs of breaking a mortgage contract and recommends understanding prepayment charges before making a change.

Use a Written Loan Agreement and Consider Registering Security

A family loan should spell out the same core terms any professional lender would require:

the amount advanced;
the interest rate and how interest is calculated;
the payment amount and frequency;
the amortization period and loan term;
whether extra payments are permitted;
what happens if a payment is missed;
what happens if the property is sold or refinanced;
who pays legal, appraisal and registration costs; and
what happens if either person dies or becomes incapable.

In Ontario, the parent may also want the loan secured through a charge registered against the property. This can provide far more protection than an unsecured promise to repay. The borrower and lender should receive separate legal advice so each person understands their rights, obligations and possible conflicts.

Registering security is not a sign that the family expects the relationship to fail. It is recognition that circumstances can change even when people do not.

Set an Interest Rate That Makes Sense for Both Sides

The family must decide whether the goal is to maximize the parent’s return, reduce the child’s borrowing cost or strike a fair balance between the two.

Compare the proposed rate with:

the child’s current mortgage rate;
competitive mortgage rates available to the child;
the after-tax return the parent could reasonably earn elsewhere;
the risk the parent is taking; and
the flexibility being offered to the child.

The agreement should also state whether the rate is fixed or variable and what happens when the initial term ends. “We will figure it out later” is not a rate strategy.

Interest Paid to the Parent Is Generally Taxable

If the parent charges interest, that interest is generally income to the parent and must be reported to the Canada Revenue Agency. Principal repayments are different from interest income, so the payment records must clearly separate the two.

The CRA provides general information about reporting interest and other investment income on Line 12100. A tax professional should review the family’s specific structure before funds are advanced.

For a child who lives in the home as a principal residence, mortgage interest is generally not deductible simply because the lender is a parent. The use of the borrowed money, not the family connection, is central to the tax treatment.

Plan for the Situations Nobody Wants to Discuss

A family mortgage must work on an ordinary Tuesday, but it also needs instructions for the difficult days.

What happens if the child cannot make a payment? Would the parent defer it, capitalize it or enforce the agreement? What if the child’s marriage ends and a former spouse makes a claim involving the home? What if the parent dies and the loan becomes an asset of the estate? Should the outstanding balance be deducted from that child’s inheritance, forgiven or collected by the estate?

These decisions should be coordinated with wills, powers of attorney and the broader estate plan. Otherwise, a private mortgage intended to help one child can create tension with siblings or leave an executor trying to interpret a conversation that was never documented.

Keep the Parent-Child Relationship Separate from Loan Administration

The emotional risk is real. If a parent reviews the child’s purchases every time a payment arrives late, the arrangement becomes intrusive. If the child assumes a parent will never enforce the agreement, it stops functioning as a loan.

Use automatic payments, provide an annual statement and schedule a formal review rather than discussing the balance at family gatherings. Clear systems reduce the chance that ordinary family conflict becomes a mortgage dispute.

A Practical Canadian Checklist

Confirm the parent can afford it. Protect retirement, emergency funds and future care needs first.
Obtain the lender’s payout statement. Include penalties, discharge costs and the exact payout date.
Compare the alternatives. Review renewal, refinancing, lump-sum prepayment and family-loan options.
Choose gift or loan. Do not use ambiguous language or undocumented expectations.
Agree on fair terms. Set the rate, payments, amortization, term and prepayment rules.
Use separate lawyers. Each party should understand the agreement independently.
Decide whether to register a charge. Discuss security and priority on title with the lawyers.
Address tax reporting. Track principal and interest separately and obtain tax advice.
Update the estate plan. Document what happens upon death, incapacity or inheritance.
Plan for default. Decide in advance what compassion and enforcement would look like.

Could Becoming the Bank Work?

Yes, in the right circumstances. A properly structured family mortgage can reduce the child’s borrowing costs, keep interest within the family and provide the parent with predictable income. But the arrangement only works if the parent remains financially secure, the loan is legally documented and both parties can respect the boundaries it creates.

The worst version is informal: a parent empties their savings, the child promises to pay monthly and nobody discusses taxes, default, title, death or changing family circumstances. That is not a strategy. It is a future argument with a payment schedule.

The best version is transparent, professionally documented and sustainable for both generations.

Helping family with a home purchase, mortgage or intergenerational move? The Murree Group | MovingSimcoe.com Team helps clients ask the right real estate questions before money, property and family expectations become entangled.

Start the conversation and build the plan before making the transfer.

This article provides general information for Canadian readers and is not legal, tax, mortgage or financial advice. Private lending arrangements should be reviewed by qualified Canadian legal, tax and financial professionals based on the family’s circumstances. Story inspiration: The Ramsey Show