How Parents Can Help Their Children Achieve Homeownership (Part 2)
In our previous post, we explored how rising home prices are leading more young homebuyers to turn to their parents for financial help to achieve their goal of homeownership.
Parents can help a child with their home purchase in a number of ways, including acting as a guarantor on the loan, co-signing the mortgage, or gifting all or some of the down payment funds.
In this post, we’ll review each of those options, including some of the considerations of each.
Co-signing the mortgage
As a co-signer on the mortgage, the parent’s name gets added to the title of the property and all other documents pertaining to the mortgage. Having a co-signer on the loan can be particularly helpful when the primary borrower doesn’t have sufficient income to qualify for the mortgage on their own.
Legally, the co-signer is a co-owner of the home, which means they’re also liable for the mortgage payments if the other co-signee—the child in this case—fails to meet their payment obligations. The parent would then be responsible for 100% of the mortgage payments until such time that the primary borrower could re-start their payments.
It’s also important to note that the co-signer can only be removed from the title and mortgage loan if the main applicant is able to qualify on their own. Even at such time, the co-signer would be responsible for paying any legal costs associated with changes to the property title.
Pro: If the parent if also gifting any funds, becoming a co-signer as well can help you protect that investment given that you’ll be on the title.
Con: Removing the parent as the co-signer could potentially trigger land transfer tax implications.
Con: If the co-signer isn’t a first-time homebuyer, this could impact the land transfer tax rebates. A lawyer can look at various ways to help mitigate this, such as decreasing the co-signer’s percentage ownership on the title.
Guaranteeing the loan
A guarantor is similar to a co-signer in that they promise to become responsible for taking over the mortgage payments should the primary borrower become unable to do so.
The difference here is that guarantors aren’t added to the title of the property. So, while their financial history is being used to boost the lending profile and guarantee the mortgage loan, they don’t own any right to the property.
Parents who guarantee a mortgage loan for their child usually do so temporarily until such time that their child can qualify for the mortgage on their own. This generally happens within a couple of years of the original agreement, once the primary applicant has a chance to repair their credit history and improve their financial situation.
Some lenders may require the guarantors to also be co-signors
Gifting the down payment
One other option for parents wanting to help their child purchase a home is to simply gift a portion of the down payment funds needed.
But it’s critical to remember that gifted down payments are as the name suggests: non-repayable gifts.
That means parents need to be prepared to part with that money for good. Otherwise, if there’s an expectation that the money will be repaid at some point, the lender will treat those funds as a loan, which will negatively impact the borrower’s debt service ratios.
There are certain restrictions when it comes to gifting down payment funds. For example, some lenders won’t permit the property in question to be non-owner-occupied (i.e. a rental or investment property and some gifted funds can’t come from outside of Canada (or the gift could be limited in such cases). And in most cases, you’re ineligible to gift funds if you’ve previously had a bankruptcy.
Lenders will require a gift letter signed by all parties declaring that the funds are indeed a gift, as well as proof of the source of funds.
Weigh the options
While most parents will do almost anything for their children, it’s important to carefully weigh the benefits and risks of each of the above options. Each of them entails risks to the parents’ financial standing.
If you are considering helping a relative with their home purchase, be sure to reach out to a licensed mortgage broker for advice. They can go over the benefits and risks of each option in greater detail and help find the solution that works best for you.