There are many reasons
parents help adult children buy a first home. For some parents, it makes sense
to buy a home for their children to use while they’re away at university or
college; for others, to help their child start their adult life on a solid
footing. With many first time buyers
still finding it all but impossible to secure a mortgage, some parents have
taken the decision to give their children a helping hand onto the property
ladder.
With rising real estate prices in the Toronto area, more
and more parents are helping their children buy their own first home. If you
also want to help your kids, please keep in mind to plan your steps properly.
Everybody should know if the new home is a loan or a gift and what are the
obligations.
If it is a loan, there will probably be a second mortgage
registered on title and the bank will have to know about it and approve.
In some cases you
have to co-sign a loan by adding your name to
your child’s mortgage, especially when your kids income is too low. Parents are
offering to include their own income and then to guarantee the mortgage.
This
can seem like an easy way to help out but there are things to consider. Many
lenders want the parents on title to the property and to sign the mortgage. This
is even if they may hold as little as a 1 per cent interest in the property. That
means also if something goes wrong, the parents are legally responsible.
They feel more secure if the parents are on title as
opposed to just being a guarantor, although most lawyers could not explain the
difference. In both cases, they are responsible if the kids default.
No matter how small the ownership stake by parents, the
deal must be carefully structured. How do the kids get that 1 per cent stake
back, if that was what was intended?
Stephen Pearlstein, a lawyer from Minden Gross in
Toronto, gives an example for this: if the parents try to transfer the 1 per
cent back to the kids without telling the lender, this will actually cause the
mortgage to go into default. That’s because the standard terms of a mortgage
typically state that the mortgage comes due at the option of the lender, if
someone sells their interest.
It is worth noting that even if the parents transfer
their 1 per cent share, they are still responsible if the kids don’t make the
mortgage payments, since they signed the mortgage originally.
Alan Silverstein, another lawyer at the same event, noted
that if the person helping with the loan is perhaps an aunt or uncle, who is
not moving into the home, then it could jeopardize the kids’ eligibility for
the HST new home rebate, if it is a new home or condominium. This could cost a
buyer up to $27,000 if investigated by the income tax authorities. The reason
is that if everyone on title is not moving into the new home as their primary
residence, or is a direct relation to the one moving in, like a parent-child
relationship, then the buyer does not qualify for the rebate, even if they own
99 per cent of the property. An uncle, for example, is not considered a direct relation
under the Income Tax Act.
It was suggested that the parents leave their 1 per cent
share to the kids by just doing an amendment to their will, so the kids would
end up with it later. Without a will, problems could arise later if other
beneficiaries do not wish to co-operate and want to sell the home to get their
share of the estate.
Another suggestion was for the parents to state at the
time of purchase that they held the 1 per cent in trust, so that it could later
be transferred back to the kids with no tax consequences at all. The problem
with this is that if the property value falls and the parents are sued by the
lender to pay for any shortfall, the parents might later try to argue that if
they never intended to take the title to the 1 per cent and the lender somehow
knew about this, they were not responsible to pay any deficiency.
Sometimes it may be necessary for the kids and parents to
have a different lawyer advise them, as there may be conflicting interests.
So it’s not that simple. The best thing is to make sure
that, before parents offer to help kids purchase, they get legal advice to make
sure that everyone is properly protected.
If you need help in finding a house for your kids in Durham Region or are already a homeowner and wish to move to a new house in Pickering, Ajax, Whitby, Brooklin, Oshawa, Courtice or Bowmanville, please contact me or/and visit my website. I can answer all of your questions, help you find the right neighbourhood and the perfect house at a great price.
