A combination of high real estate prices and new mortgage rules designed to restrict risky lending have led to an increase in parents opting to assist their children with purchasing their first home. Desperate, cash-strapped millennials looking to finally break into the hot housing market are turning to the “bank of Mom and Dad” in record numbers for the financial help they require. Many times, the parents are helping a child reach the 20 per cent threshold for a downpayment, which could help save them thousands, because they will not need the government-mandated mortgage default insurance. However, there are numerous legal considerations to take into account for both the parents and the child when entering into this sort of home purchasing arrangement.
From the perspective of the child, he or she must understand that in the majority of cases, this arrangement means that the parent(s) would likely need to be on title to the property as well as be on the mortgage with the child. The significance of such is that the child will not be free to dispose or otherwise deal with the whole of the property (or the mortgage) without that co-owner parent’s cooperation. In addition, as a first-time homebuyer, the child’s eligibility for the land transfer tax credit on the closing of the property would be affected if the parents are required to be on title with the child. The amount of the tax credit for the child would be reduced in proportion to the child’s ownership interest in the property. For instance, for a home in Toronto, if the child is directed to have a 50% ownership interest on the deed, he or she would only be eligible to receive 50% of the land transfer tax credit (e.g., for a home in Toronto, that would mean missing out on an additional $4,000 in savings toward the land transfer tax). In order to take full advantage of this tax credit, ownership should instead be structured such that the child is shown as owning 99% of the property, with the remaining 1% interest being held by the parent(s).
From the perspective of the parents, there are a variety of legal implications to providing assistance to their child when buying a home. Because the bank will normally require the parents to be bound as one of the borrowers on the mortgage, they must be aware of the liability that this entails. Using the example for ownership structure noted above, despite only having a 1% interest in the property, the parents would still be 100% accountable, along with the child, for any default on the mortgage.
It should also be noted that when money is being loaned or gifted to a child to assist with the downpayment, such loan or gift should be duly documented on closing. For example, if the money is being loaned, a co-ownership agreement, loan agreement or promissory note could be prepared by the lawyer handling the closing to ensure the parent’s loaned amount is repaid in full when the property is sold. Such documentation would, among other things, outline that the amount loaned by the parents would be returned to the parents upon the sale of the property from the net sale proceeds in priority to the child (or his/her spouse) receiving his or her share of such proceeds. This kind of agreement is necessary to evidence the parties’ intentions; absent this documentation, with the 99% – 1% ownership structure as referred to above, the deed alone would take effect and the parents would only be entitled to receive 1% of the net sale proceeds. Such documentation could also prove extremely beneficial when the child has a spouse and they both live at the purchased property (i.e., it is a matrimonial home). Upon marriage breakdown, the parent may want to protect his or her loan advanced from being subject to family law claims from the child’s ex-spouse. If one of the above agreements is signed by the child and his/her spouse acknowledging the loan advanced by the parents for the purchase of the property and the terms of repayment, this could potentially insulate their money from being entangled in their child’s financial or marital problems.
Parents should also consider how gifting or loaning a downpayment affects the rest of the family. If parents want to ensure their assets are divided equally to their children, they should ensure their Wills contain an equalization provision, including a legacy clause. That way, any major amounts gifted to one child would be acknowledged and the other children would receive the same benefit.
If you are considering gifting or loaning a large sum to your child for payment towards a home, always take the time to speak with your real estate lawyer about the legal implications of doing so. He or she should be able to canvass your options and advise you on how best to document your intentions and secure your interest.