Who this is for: Heirs or executors who want to keep a family home, have agreed or been told what each share is worth, and can carry the new debt without the other heirs' help.
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An inherited house carries more than its price. It carries memories, a family’s disagreements, and a deadline nobody chose. When one child wants to keep it and the others want their share in cash, money is the practical problem. A second mortgage can sometimes fill it, but the legal and tax steps come first, and getting them wrong costs more than the loan.
What an estate or inheritance buyout is
A buyout is a transaction in which one heir pays the other heirs for their shares of a home, so that one person ends up owning it. The money can come from savings, a refinance, a family loan, the sale of other estate assets or a new mortgage. If the home already has a mortgage that will stay in place, a second mortgage can raise the rest. The Financial Consumer Agency of Canada notes that second mortgages usually come with higher rates than first mortgages, because lenders take on more risk.
If the house has no mortgage, the new loan is usually the first one on the title, which may be cheaper and may qualify for a bank. A second mortgage fits mainly when a first mortgage is already there and worth keeping.
When it makes sense
It makes sense when the shares are agreed, the paperwork is ready, and the person keeping the home can pay the debt from their own income. The home may be the only place with space for a family member with special needs, or the only home in a community where the heir works. The buyout can then be an honest solution that the others support.
It also makes sense when a bank will not lend for reasons that have nothing to do with the home’s value, such as an income that is hard to document, or a credit file bruised by caring for a parent. A private lender looks mainly at the equity.
Timing sometimes drives it. A will, an agreement or a lease on an estate may set a date by which the others must be paid, and a short-term loan can bridge to a refinance.
When it makes things worse
It makes things worse when the agreement is not real yet. Taking a loan before every heir has signed can leave you with fees and a loan secured on a house you do not fully control.
It also goes wrong when the heirs value the home differently. A lender lends on the appraisal. If your siblings expect $800,000 and the appraisal is $720,000, the shares you can fund are smaller than the shares they expect.
It is a poor fit when the new debt makes the home unaffordable. Keeping a house you can barely afford can cost more than letting it go. Selling and dividing the proceeds is often the better outcome, even when it feels like a loss.
What it really costs
The worked examples above start with the loan and then show the tax question. The first shows three heirs sharing a $720,000 home, where buying out two of them takes $480,000. Add the interest, the lender fee, any broker fee, and appraisal, title search, title insurance and legal costs, which the agency lists among the costs of borrowing against home equity. At a made-up 12% interest-only rate, $480,000 would carry $57,600 of interest in a year before fees, so test the payment with the calculator before you agree to a price.
Estate costs are separate. Legal fees to transfer the property, the cost of probate or its equivalent in your province, and the appraisals for the estate are real expenses that the estate or the heirs pay.
The second example looks at tax. The Canada Revenue Agency says that a person who dies is considered to have sold all their property just before death. Any gain is reported on the final return, and a principal residence may be exempt in whole or in part but must still be designated. This can change how much the estate has to share, so ask the estate’s accountant early.
The risk to the home
The home becomes security for the loan. If you cannot repay, the lender can enforce, and the agency warns that failing to repay a home equity loan can lead to serious consequences, including foreclosure. You will also have paid out the other heirs, who are not coming back to share the loss.
There is a family risk as well. If the loan goes wrong, the people you bought out may feel responsible, or blame you. A written agreement signed with legal advice protects relationships as well as money.
Keep paying any first mortgage that remains on the house. A default can lead to action on the whole property.
Options to try first
Start with the estate lawyer. They can tell you who has the authority to deal with the home, what has to be signed, and whether the home should be sold. Ask whether the other heirs would accept payments over time, a smaller upfront payment, or a share of other estate assets instead of cash.
Ask a bank about a mortgage or refinance on the home. A bank may offer a lower rate than a private lender, and an estate buyout with a stable income is something many lenders understand. If you are buying out a spouse instead, see the page on separation buyouts.
Selling the home and dividing the proceeds, renting it out, or one heir buying it at appraised value from the estate all cost less in fees than a high-cost loan. Compare them using the HELOC and second mortgage comparison to see how the borrowing options differ.
How the exit works
Decide how the loan ends before you sign. Common plans are a refinance with a bank after the estate closes and your credit has settled, a sale of the home, or a payoff from other inheritance money still to come. A bank refinance depends on your income, credit and the appraisal at the time. Do not rely on money from the estate that has not been paid yet.
Most private loans are short, and the balance is due at the end. Ask what an extension costs and what a late payment triggers, and have both answers in writing.
What to ask before you sign
- That an estate lawyer has confirmed who can sign and when title can be transferred.
- That every heir has agreed to the price in writing.
- The total cost of borrowing in dollars for the full term, with every fee shown.
- What you will still owe on the last day, and what an extension costs.
- How any estate tax owing will be paid, and by whom.
- The name of the licensed professional and how to check their licence with your provincial regulator.
If you want to talk to a licensed mortgage professional in your province once the legal work is in hand, you can check your options. You are free to say no.
Three heirs, one house worth $720,000 and no mortgage
Made-up values. The home is assumed to be worth $720,000, owned equally by three heirs, with no debts against it. Uses the general ceiling of 80% of appraised value described by the Financial Consumer Agency of Canada.
- Each heir's equal share
- $240,000
- Cash to pay out the two heirs leaving
- $480,000
- 80% of the home's value
- $576,000
- Room left under the 80% ceiling
- $96,000
$720,000 divided by 3
2 x $240,000
$720,000 x 0.80
The tax question on a parent's home that was not a principal residence
Made-up figures. A parent bought a property for $200,000 that was assumed not to qualify as their principal residence, and it is worth $720,000 at death. The Canada Revenue Agency says half of a capital gain is generally taxable. Tax rates are not shown.
- Value at death
- $720,000
- Original cost
- $200,000
- Capital gain
- $520,000
- Taxable half of the gain
- $260,000
$720,000 minus $200,000
Questions people ask
Can I borrow against an inherited home before the estate is settled?
Usually not until the legal representative has the authority to deal with the property and the title can be transferred or charged. The timing depends on the will, the province and the paperwork. Ask the estate lawyer what has to happen first, because a lender will need to see it.
Who pays tax when a parent's home goes to the children?
The Canada Revenue Agency treats a person who dies as having sold their property just before death, which can create a gain on the final return. A principal residence may be fully or partly exempt, but it must be reported and designated. The estate's accountant handles this.
What if my siblings want more than the home is worth?
An independent appraisal gives everyone the same starting figure, and a lawyer can help settle differences. A lender will lend against appraised value, not against what the heirs believe the home is worth, so a gap leaves you short.
Do all the heirs have to agree to a buyout?
If the will gives the home to several people equally, the others normally have to agree to transfer their shares, or a court may be asked to decide. Agreement is simpler and cheaper. Get it in writing, with a lawyer, before any loan is arranged.
Is a second mortgage right when the home has no mortgage on it?
If the home is free of debt, the loan to buy out the others would usually be the first mortgage on it, which may qualify for mainstream rates. A second mortgage applies when an existing mortgage is staying. Compare both with a bank first.