Given the steadily swelling average home prices in the Toronto, many first time homebuyers are seeking assistance to jump on to that first rung of the property ladder. And what better place for these first-timers than to get a boost, than on the financial shoulders of Mom & Dad?
Recently, we posted an article about the emerging of the Bank of Mom & Dad and the growing trend for parents to gift their kids large sums of money to assist in home purchases. This is partly the product of the frenetic market of Toronto Real Estate, where supply and demand mechanics continue to tilt out of whack, putting steady, upwards pressure on property prices. This, coupled with the growing wealth of the Baby Boomer demographic, who have spent much of their earning lives accumulating assets (many in real estate, which has flourished over the years), and are now eager to share some of their good fortune and shrewd financial success with their kids, by means of passage into home ownership.
Parents are gifting large sums not only to help reduce mortgages for their kids, but to also pad their down payment so that they can skip CMHC insurance premiums which, when added to a mortgage and amortized add up to hefty charges.
That said, and recognizing the strength of this particular phenomenon, there comes to light a very salient point (and series of legal arguments and discussions) addressed in this recent article in the Toronto Star.
Parents need to consider life beyond the transactional moment of giving kids money to bask in the glow of homeownership, while deriving a certain parental glee knowing that their financial assistance helped make it happen. They need to define their expectations are with said money. Is their gesture a gift (straight up, no repayment required) or a loan (as in, at some point, there is an expectation of repayment)? Further to that, what are the expectations in terms of property ownership and consideration for that part?
If the money that parents are giving to their kids is a loan as opposed to a no-strings-attached gift, then there enters the likelihood that lenders (and parents) will require a second mortgage to be registered against the home, in order to protect their interests.
Furthermore, in scenarios where children do not meet debt-service ratios required to get a mortgage on their own accord, parents sometimes throw in their income as well to serve as a guarantor. What many lenders are requiring though now, is that parents actually sign on beyond guarantor status, and become mortgage holders and property owners alongside with their children for the properties in question.
This opens a whole other debate around ownership, and how deals should be structured to reflect the “ownership” of the property.
There are a myriad of other potential complications as a result of this, including tax issues and qualification for HST rebates or First Time Homebuyer programs.
In the scenarios discussed in the Toronto Star article, lawyers look at different ways for parents to give back that slice of ownership to their children over time (and assumedly after their debt to their parents has been repaid), including leaving their percentage of ownership to them in their will or to leave it in trust.
One of the tricky situations brought to light is that if parents, who set out with a partial ownership of a property with their children under the conditions laid out in the previous paragraphs, cannot simply “return” their ownership to the kids in good faith without informing the bank (who might very well require a whole new mortgage to reflect the change in terms and signers on title and loan). The mortgage loan would actually go into default.
What perhaps begins as a move of parental altruism becomes laden with legality and bursts another kind of property bubble. Both the buyers-to-be, and their parents, should fully think through and understand the implications and complexities of what you are each getting into, as well as exploring how critically important you should get legal counsel before entering any deal.
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