With the cost of housing soaring, young home buyers are finding it increasingly difficult to qualify for a mortgage and lenders are more commonly requiring that parents co-sign on the mortgage. It used to be that parents were simply required to guarantee the mortgage, but this option is now rarely available. Lenders instead are opting to have parents go on the mortgage as co-borrowers with the children.
By co-signing on the mortgage, the parents are required to go on title to the property along with the children, which has a number of implications for both the children and the parents. Often times, people who enter into this arrangement do not fully comprehend the ramifications.
With the parents going on title along with the children, this affects the amount of the land transfer tax rebate that the children would otherwise be entitled to if the children are first time homebuyers. There are also estate implications that need to be considered, as it is usually not the true intention of the parties that the parents or their estate have an interest in the property. Further, the parents can face tax implications when the property is ultimately sold if the property is not their principal residence. As a co-owner, the parents are also exposed to potential liability with respect to the property.
In order to deal with these issues, it may be advisable to have a Declaration of Trust signed prior to closing setting out that the sole reason that the parents are going on title is to assist with financing and that they are holding their interest in trust for the children. By holding the property in trust for the children, the parents are subsequently able to transfer their share back to the children, the true beneficial owners, without land transfer tax being payable when the mortgage is up for renewal if the children at that point qualify for financing on their own. In my experience, most lenders are willing to accept the trust declaration, so long as all parties remain jointly and severally responsible under the mortgage.
It is also recommended that all parties have their wills updated to address their interest in the jointly owned property.
If you are a parent or child in this situation, you should be consulting with legal advisors to ensure that your respective interests are adequately protected and that the transaction is structured in such a way that your true intentions are reflected.
Werhun Law is a law firm located in Etobicoke serving the Greater Toronto Area. Werhun Law provides services primarily in residential and commercial real estate, mortgages, commercial leasing, and wills and estates. If you have any questions or are in need of legal services you can contact us at firstname.lastname@example.org.
The information in this post is for general informational purposes only. It does not constitute legal advice and does not create a solicitor-client relationship.