In today’s real estate environment, especially in markets like Toronto, it has become commonplace for parents to help their children purchase property. The question is, what is the best way for you to help?
One option you can consider is co-signing for a mortgage. Co-signing a mortgage comes with risks. Before committing to co-signing your child’s mortgage, you should always speak with a professional who can explain all the liabilities to which you’re vulnerable.
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Why Help Your Child?
There are several reasons why my clients do so. First, the rental environment in Ontario is very precarious. Ontario has seen an uptick in renovictions and in evictions for purchaser and owner use as the current economic environment has put financial pressure on landlords. Evictions usually mean paying more rent and competition is fierce in the rental market. With escalating rents, saving for a down payment becomes very difficult.
My clients are also trying to nudge their children out of the nest. They have secure employment, but life is too comfortable at home. They may have gotten into the habit of spending the money they have. Having responsibility for home ownership will force them to be more diligent with their finances and build wealth. This also gives them the satisfaction and feeling of accomplishment that comes with being independent.
Buying a home isn’t easy. Check out these related blogs for more advice on affordability and making the most of your market journey.
- What’s the Most Cost-Effective Housing Option in Toronto?
- Should I Rent or Buy a Starter Home in Toronto?
- Should You Help Your Kids With a Home Downpayment?
Do You Have To Go On Title?
Yes, you do. Be wary of going on the title of your child’s property. You could be subject to capital gains tax, and you will be on the hook if your child or their partner ends up in financial hot water. The reverse also applies. I once had an investor client who purchased a house in their child’s name with the intent of flipping it. The build did not go as planned, and they compromised their child’s credit and future as a result.
I have another client whose parents cosigned on their child’s home, and when they were ready to purchase a new house, they were prevented from doing so because of their financial obligation to the other home. Their child could not yet qualify for a mortgage on their own.
As I’ve said, a good real estate lawyer is critical, but you may also want to speak with your accountant to understand your tax risks.
Case Study: The Catch 22
I have experience working with clients who have chosen this path. The mom, nearing retirement, saw her recently married son and daughter-in-law facing a situation where the cost of renting was consuming so much of their income that they were never going to be able to pay their rent, living expenses, and save enough money for a downpayment on a home all by themselves. The real estate market values were outpacing their savings, the ultimate catch-22.
The young couple had some downpayment money in their savings but couldn’t qualify for the mortgage they needed without outside help. Mom looked at their situation, and like moms do, she stepped to the plate and offered the option of co-signing. Mom couldn’t be the bank of Mom and Dad and stroke a cheque providing a larger downpayment so the kids would qualify for a mortgage.
They had to be more strategic. When we looked at all the potential scenarios and decided that mom co-signing for a mortgage was the solution they were looking for, I referred them to a mortgage professional.
The outcome for this young couple was fantastic. With their mom’s help, they entered the real estate market and bought their first house. I’m also happy to report that by the end of their first mortgage cycle, a three-year term, they positioned themselves to no longer require Mom to be a co-signer, removing her from any liabilities.
Partner With The Right Real Estate Agent
Having a realtor with specialization and expertise in this area is invaluable. As a Senior Real Estate Specialist (SRES) I understand the nuances involved in such delicate circumstances. I share insight and provide advice so that my clients are empowered to make good decisions. Providing solutions for your specific situation helps you do what’s best for you and your family.
Have questions about helping your child buy a home? I can help. Get in touch with me at 647.283.2127 or send me email at stuart@stuartnodell.com.
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