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The perils of helping kids buy a home

By Robert Hof

As a result of the high prices in the real estate market, parents are assisting their children with the purchase of a home. Depending on the type of assistance provided, care must be taken in how the deal is structured so that the parents, kids and the bank are all informed and protected.

Sometimes parents assist with the down payment. Questions need to be asked if this is intended as a gift or a loan. If it is a loan, there will likely need to be a second mortgage registered on title to protect the parents. The bank will have to be notified about this and approve.

When the kids cannot qualify for the mortgage payments because of their income, parents are offering to include their own income in the equation and guarantee their kid’s mortgage. This would be a good solution, however, many lenders are now requiring the parents, either one or both, to be on title to the property and sign the mortgage, even if they are holding just a 1% interest. Apparently lenders feel more secure if the parent is on title as opposed to a guarantor, although most lawyers could not explain the difference.

However, taking even a 1% interest in the title means that the deal must be carefully structured. How is the 1% supposed to come back to the kids, if that was what was intended? Stephen Pearlstein, a lawyer from Minden Gross in Toronto, recently gave a seminar on this point to several hundred lawyers and many questions arose. For example, if the parents try and transfer the 1% interest back to the kids, without telling the lender, this will actually cause the mortgage to go into default, because the standard terms of a mortgage typically state that the mortgage becomes due at the option of the lender if someone sells their interest. It is worth explaining that even if the parents do transfer their 1% share, they are still responsible if the kids don’t make the mortgage payments, since they signed the mortgage originally.

Alan Silverstein, another lawyer speaking at the same event, noted that if the person assisting with the loan and taking a 1% interest is not the parent of the buyer, but perhaps an aunt or uncle, who is not moving into the home, then it could jeopardise the kids’ eligibility for the HST new home rebate, if it is a new home or condominium. This could cost a buyer up to $27,000 if investigated by the income tax authorities.

It was suggested that the parents just leave their 1% share to the kids by doing an amendment to their will, so the kids would end up with it later. Without a will, problems could arise later if the parent dies and the other beneficiaries do not wish to co-operate and want to sell the home to get their share paid for.

Sometimes it may be necessary for one of the kids or even the parents to have a different lawyer advise them, as there may be conflicting interests.

As you can see, it is not simple. The best thing is to make sure that before parents make any offer to assist with any purchase decision of their children, they get legal advice in advance to make sure that everyone is properly protected.

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Mark Weisleder is a Toronto Real estate lawyer who articles are published in the Toronto Star.

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