A lawyer and respected real estate veteran is offering a fresh warning for those enlisting the help of family members for a down payment – a word of caution brokers should share with all first-time buyers and, indeed, their parents.
“If the parents try to transfer the 1 per cent back to the kids without telling the lender, this will actually cause the mortgage to go into default,” Mark Weisleder wrote in a column for the Toronto Star. “That’s because the standard terms of a mortgage typically state that the mortgage comes due at the option of the lender, if someone sells their interest.”
It is worth noting that even if the parents transfer their 1 per cent share, he said, they are still responsible if the kids don’t make the mortgage payments, since they signed the mortgage originally.
“It’s always great to help your kids if you can, but you have to think carefully about what you’re doing,” Weisleder writes. “This will ensure everyone knows whether it’s a loan or a gift and their obligations going forward.”
Essentially, if it’s a gift, there are no strings attached, he said, but if it’s a loan, there will likely be a second mortgage registered on title to protect the parents
“The bank will have to know about it and approve,” Weisleder said.
Parents can offer to be a guarantor if their child buyer’s income doesn’t meet the necessary thresholds. However, lenders will often require the parent’s name to appear on the deed as well. And an important consideration – and one that may often be overlooked – is to figure out how to transfer the percentage owned by a parent back to the child.
One workaround, Weisleder notes, is to have the parent leave the rest of the property to their child in their will.
“It was suggested that the parents leave their 1 per cent share to the kids by just doing an amendment to their will, so the kids would end up with it later,” Weisleder writes. “Without a will, problems could arise later if other beneficiaries do not wish to co-operate and want to sell the home to get their share of the estate.”