As housing affordability continues to be a challenge, it is increasingly common for parents to help an adult child purchase a home. That assistance may take the form of a gift toward the down payment, a family loan, co-signing or guaranteeing the mortgage, or joining the child on title.
Although these arrangements are common, they can have very different legal and practical consequences. How the assistance is structured can affect mortgage financing, land transfer tax rebates, ownership of the property, and what happens when the property is eventually sold or refinanced.
For parents, buyers and the real estate professionals advising them, these issues should be considered early, ideally before the financing and ownership structure have been finalized.
Determine Whether the Contribution is a Gift or a Loan
One of the first questions to address is whether the parent expects to be repaid.
If the funds are being provided as a genuine gift, the mortgage lender will often require a gift letter confirming that the money does not have to be repaid. If repayment is expected, however, the arrangement is a loan and may need to be disclosed to the lender as part of the buyer’s financing.
Problems can arise where funds are described to the lender as an unconditional gift while the family has a separate understanding that the money will eventually be repaid. The family’s intentions, the mortgage application and the legal documentation should all be consistent.
Where the money is intended to be repaid, the family should also consider how that obligation will be documented.
A family loan may be recorded in a written loan agreement or promissory note. In other cases, the parents may want greater protection through a mortgage registered against the property.
A registered mortgage can provide additional security, but it also creates practical considerations. The institutional lender may restrict secondary financing or require the parents’ mortgage to rank behind its own. The parental mortgage will also have to be addressed if the property is later sold or refinanced.
These arrangements should be therefore discussed before the buyer’s mortgage financing is finalized. Trying to introduce a family loan or secondary mortgage shortly before closing can create complications with both the lender and the transaction.
Understand the Parent’s Role in the Mortgage and Ownership
These terms are sometimes used interchangeably, but they can have very different consequences.
Where a child cannot qualify for the required financing on their own, a lender may require a parent to participate in the mortgage or, in some cases, to take an ownership interest in the property.
Parents should understand exactly what role they are taking on. A parent who becomes responsible under the mortgage may be liable for the debt if the child cannot make the payments. That obligation may also affect the parent’s ability to borrow for their own purposes.
Going on title raises additional issues. Even where a parent is registered with only a small ownership interest, that interest can affect a future sale or refinancing, land transfer tax treatment and the availability of first-time homebuyer rebates. It may also create estate planning and tax consequences that should be considered separately.
If the parent is being added to title mainly because of a lender requirement, that should be identified and discussed with the lawyer at the outset. The intended ownership arrangement should be clear from the beginning rather than left to assumptions at closing.
Consider the Immediate Financial Impact
The way the purchase is structured can have an immediate financial impact.
For example, adding a parent to title may affect the first-time homebuyer incentives available to the child where the parent does not qualify as a first-time homebuyer. If a qualifying first-time buyer acquires an interest in a property together with someone who does not qualify, the amount of the available land transfer tax refund may depend on their respective ownership interests.
For this reason, where a parent must be on title, some families consider giving the parent only a modest ownership interest rather than an equal share. Any such structure should be reviewed in light of the lender’s requirements and the circumstances of the transaction.
The financing arrangement may also affect the parent’s own financial position. A parent who co-signs or guarantees a mortgage is taking on a legal obligation that may affect their own borrowing capacity. On the other hand, a parent’s involvement may help the child satisfy a lender’s qualification requirements or obtain financing that might not otherwise be available.
These issues should be considered together. A structure that helps with mortgage qualification may also have consequences for ownership, tax treatment and future transactions.
Protect the Contribution When a Spouse or Partner Is Involved
Parents often view their contribution as assistance being provided to their own child, even where the child is purchasing the property jointly with a spouse or partner.
Before making a significant contribution, it is worth considering what everyone expects to happen to that money if the relationship later ends.
The answer can depend on whether the couple is married or unmarried, how title is held, and whether the parental contribution has been structured as a gift, loan or secured obligation.
For example, two owners may hold title as joint tenants or as tenants in common. These forms of ownership can have different consequences, particularly on death or when determining each person’s ownership interest.
Special rules may also apply where the property is a matrimonial home in Ontario. As a result, the fact that one person contributed more toward the purchase price, or that one person’s parents provided the funds, may not by itself determine the outcome if the relationship later breaks down.
Where protecting a parent’s contribution is an important objective, the family should raise that issue with the appropriate legal professionals before the purchase is completed.
Think Beyond the Closing Date
It is easy to focus on what is required to complete the purchase. The arrangement should also make sense several years later.
If a parent is on title, their involvement may be required when the property is later sold or refinanced. If the parents have a registered mortgage, that mortgage will need to be dealt with as part of a future transaction. If the contribution is a loan, the family should also consider what happens if either the parent or child dies before the loan is repaid.
Parents may also want to consider how a significant contribution to one child fits within their broader estate plan, particularly where they have other children.
Thinking through these issues at the beginning is generally much easier than trying to determine what everyone intended years after the purchase has closed.
Consider These Issues Before Entering the Market
The real estate market can move quickly. Once a buyer has found a property and is preparing an offer, there may be limited time to work through questions about financing, ownership and the terms of a parent’s contribution.
For that reason, families who expect parental assistance to form part of a purchase should consider these issues before they begin actively looking for a home. They do not need to have every detail finalized, but they should have a general understanding of:
- whether the funds are intended as a gift or a loan;
- whether the parent will be involved in the mortgage;
- whether the parent is expected to go on title;
- whether repayment or security is important to the parent; and
- what the family expects to happen to the arrangement over the longer term.
Families should also think about their priorities. For some, qualifying for suitable mortgage financing may be the main concern. For others, the priority may be protecting the parents’ financial contribution or maintaining some control over future decisions involving the property.
Understanding those priorities can help the professionals involved identify potential issues and discuss an appropriate structure before the transaction reaches the closing stage.
For real estate agents, this does not mean providing legal or financial advice to your clients. It means recognizing when parental assistance is part of the transaction and encouraging clients to address the structure with their lender and lawyer early in the process.
Contact Us
For more information about parental contributions toward the purchase of a home, or to discuss how these considerations may apply to a particular transaction, feel free to contact Lorne Shuman at lshuman@shumanlaw.ca or Matthew Shuman at mshuman@shumanlaw.ca.
This bulletin is intended for general information only and does not constitute legal, tax, financial or family law advice. Advice should be obtained based on the particular circumstances of the transaction.