Things to consider when helping children buy a home
As the bank of mom and dad’s popularity shows nary a sign of abating, there are crucial things for parents helping their children become homeowners to consider.
Chief among them, says Jason Davenport, branch manager of Meridian Credit Union Greektown location in Toronto, is the legal obligation—specifically whether or not parents are gifting or loaning their child money.
“If it’s a gift, most financial institutions require a gift letter,” he said. “That’s important if things break down before the house gets sold. If it’s a loan, the money can be secured against the house often in second position, if mom and dad are worried about that.
“If it’s a matrimonial home and the excited parents give them a gift, but the marriage breaks down, then the gift becomes part of the home’s equity and there’s no way to recover it. You’re going to lose half of those funds to the other party. But if you want to guard against that, you could create a loan and put a lean against the house. If the marriage breaks down and the house is sold, after the bank takes its share from the remaining equity, you can recoup those funds. But, without anything like that, for all intents and purposes, that money is gone for the parents.”
Mom and dad also have to be cognizant of not overextending themselves and compromising their retirement. Davenport warns that spending such a big chunk of their money could jeopardize investment goals and even much-needed renovations in their own home. In the B-20 mortgage qualification era, that’s a real possibility.
“If you’re helping your kids buy a new home, getting another individual on the title—like mom or dad—as a guarantor or co-signer is an option, but there are different responsibilities,” explained Davenport. “A co-signer on the property’s title is 100% responsible for other people should anything happen, and if they refuse or can’t pay, the co-signer is 100% responsible for the property. They’re on the hook.”
A guarantor doesn’t go on title, but there’s no recourse should anything happen to the home. There’s still another catch, though.
“They’re still 100% responsible for payments, again, should anything happen to the home. It’s most likely we’d go to them if payments are required.”
Foresight is the name of the game, says Davenport. In the event of tragedy or a dissolved marriage, planning ahead prevents a lot of headaches, and even heartache, later. Davenport says that more important than money is the relationship between parents and their children.
“Make sure you run the numbers before making any decisions,” he said. “Individuals with greater assets should think about an inheritance later versus a gift now. If they’re thinking about what their estate will look like, taxation is part of the equation because you pay a big chunk. If you want to get around it, you can confront the tax liability now, meaning you can incur the liability now for whatever it will be on the inheritance later and the end result is you’d more than likely be net ahead for the estate. Sometimes giving money to your kids before you get to that point can have a positive result on what you want for your estate.”