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, when providing funds for a property purchase, need to consider life beyond the transactional moment of helping their kids achieve homeownership. Along with deriving a certain parental glee knowing that their financial assistance helped make a purchase possible, parents should clearly define what their expectations are, if any, with said money. Is their monetary 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 it's possible your financial institution, along with your parents, will require their loan be registered as a second mortgage on the property 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 may sometimes agree to be a guarantor to provide greater security to the lender. However, what many lenders are now requiring, is that parents actually sign on beyond the status as simply 'guarantor' and actually share in being mortgage holders alongside with their children for the dwelling in question.
This opens a whole other debate around ownership, such as how each purchase should be structured amongst the family to reflect the “degrees or percentages of ownership” of the property.
With this are a myriad of other potential complications as a result of this, including income 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 the loan 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). If that occurred, there is a risk the mortgage loan could be deemed as having gone into default.
What perhaps begins as a move of parental altruism can become mired with issues of legality. It's critical both the buyers-to-be, and their parents, should fully think through and understand the implications and complexities of what each are getting into, as well as exploring how critically important everyone should get legal counsel before entering into any acquistiion.
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