Joanne McPhail
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Buying a House (with your parents)

Updated Wednesday, November 14, 2012  ::  Views (19184)

Back in “the day” when a young person buying a home needed some help from his/her parents to get their first mortgage, the parents would act as “guarantors” of the mortgage.  This obviously came with risk to the parents, but more often than not, after those risks were explained, parents were willing to sign on the dotted line to help their kid get that coveted first home.  A few years later, the banks had gone through some enforcement procedures, suing parents where their kids had defaulted on their mortgages, and in some instances, the parents were successful in defending those actions by claiming they didn’t truly understand what they were signing when they had originally executed that guarantee and they got nothing in return for doing so.  The banks got antsy about this, and so started requiring the parent to go on title with the kid, so they were getting something in return for signing off on the mortgage.  This, however, had an impact on the kid (and their ability to deal with the home however they wished) as well as the parent.  There were both tax and estate planning implications to these arrangements.  So we started out trying to minimize some of these issues by giving the parent a 1% interest in the home so, for instance, if the child sold the home 5 years later, the parent would only have to pay capital gains tax on 1% of the increase in value.  Keep in mind that usually, in these situations, the parent already has his or her own principal residence and so any other properties they “own” would be subject to capital gains taxes on sale. 

We are now seeing an increase in lending institutions requiring joint tenancy between the child and the parent, which is causing even greater difficulties from a tax and estate planning perspective.  Often, by the time we get the instructions on a mortgage, it is too late to negotiate this, so please keep this in mind.  How you hold title does matter.  And if you need your parent on title with you, speak to your lawyer about how your lender is wanting this structured, so you know before you sign on the dotted line, whether this makes sense for you.
Buying your first home is a big step.  Bring your lawyer along during the process, to ensure it’s a step in the right direction.

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