The cost of a new condo in Toronto has risen significantly over the past few years and most younger adults are now simply being squeezed out of the market. The result, parents are stepping in to help with the purchase by either assisting with the down payment or co-signing so a loan can be approved.
Parents participate primarily in 2 differently ways to help their children buy their first condo. Some parents have the finances available to offer a loan and others are able to offer the money straight up as a gift. How much parents can help is also affected by how many children they have. They will often want to make sure that each child has the same option when it comes time for them to leave the family nest.
There are a few key questions any supportive parent should ask themselves before offering to help their children with this type of real estate investment. They need to first be sure the child will be making enough money to pay the mortgage ongoing and for the general upkeep and repairs of the property.
Also, the parent needs to be sure that if the child is married, that the marriage is stable and properly structured legally. One way to avoid any potential issues in this area is to make sure that the money given in this scenario is done as a loan and not as a gift. This does not necessarily mean that the loan needs to be ever paid back, but it does give the parent the option to ask for the loan to be repaid in case something like a separation or divorce does take place.
If a parent co-signs for a mortgage loan, they will either be listed on the title or as a guarantor of the property. Lenders can often make this a necessary step even if the parents only have a 1% interest in the property. As long as the parents are on title, this 1% cannot be transferred back to the children at any time without a new mortgage being put in place.
Another issue that can arise if a child gets help with a loan is the eligibility of the HST new home rebate. If someone other than a parent is assisting with the loan, then the buyer will not qualify for this rebate. According to the law, everyone on the title needs to be moving in to the new home or has to be a direct relation to the person moving in. If the buyer receives the rebate and the income tax authorities investigate in the future, the buyer could be responsible for up to $27,000.
Parents need to be aware that if they are listed on the mortgage, then they are responsible for any missed mortgage payments. One of the best options for a parent might be to offer assistance after their child has figured out how much they can afford and have found a suitable condo to fit that budget alone.
No matter what decision a parent makes about helping their children, everyone should have their own lawyer. There may be conflicting issues that arise and this way both parties have their own lawyer to sort things out legally. In dealing with family it is always smart to have all your T’s crossed and your I’s dotted, especially on the legal front.