The dramatic increase in property values coupled with the increase in interest rates is making the goal of owning a home an impossibility for many millenials. The reality is that many millenials will need the financial support and assistance of their parents or relatives to help them obtain a down payment to purchase a home. In situations where the parents are providing a gift or loan to their child to assist with the down payment, I am often asked by the parents for advice on how they can protect their financial contribution in the event the child later separates from their spouse or partner. The response to this question will depend on a number of factors. This article will provide some guidance for parents who are providing financial assistance and want to understand how to protect their contribution.
The first point to consider is whether the financial contribution is a gift or a loan. A gift has no expectation of repayment. A loan, on the other hand, has an expectation of repayment. If the funds are a loan, then this should be clearly spelled out in a legal document setting out the terms of repayment. If the parent does not want the child’s spouse or partner to benefit from a gift, then it is important to document that the funds as a loan and not a gift. Without a formal document in place, the courts have traditionally treated the funds as a gift in the absence of a promissory note or mortgage loan agreement. In such cases, it is possible for the ex spouse or ex partner to benefit from the funds upon a breakdown of the relationship.
If the funds are a loan, it is important that all of the parties sign legal documents to support this. One way to do this is by having the borrowers sign a promissory note which can set out the amount of the loan and the terms upon which the loan is to be repaid. Another option is for the parties to sign a mortgage which can be registered on title to the property similar to when a bank provides a mortgage. This is the best protection for the parents because the child will not be able to refinance or sell the property without paying off and discharging the mortgage. The downside to this is that the bank providing the first mortgage to the borrower may not permit any secondary mortgages to be registered on the property.
Regardless of whether the funds paid by the parent are a gift or a loan, it is advisable that the child enters into a cohabitation agreement or marriage contract with its current or future spouse. This type of agreement is usually prepared by a family lawyer. This agreement will set out the method for dividing assets in the event of a breakdown of the relationship or marriage. The agreement should clearly set out how any gifts or loans from parents are to be distributed with specific reference to property division.
Financial assistance from parents is either a gift or a loan, but it cannot be both. For parents who are providing financial assistance to a child to purchase a property, it is imperative that they obtain legal advice from an experienced real estate lawyer and possibly a family lawyer to understand how they can protect their contribution towards their child’s property.