It’s tougher than ever to break into Canada’s housing market. Affordability is at an all-time low owing to a combination of steadily rising home prices and high interest rates.
It’s no wonder that some young Canadians who buy homes are doing so with parental help. A recent report from Statistics Canada, written by statisticians Aisha Khalid, Joshua Gordon and Michael Mirdamadi, reveals that in 2021, 17.3 per cent of residential properties owned by people born in the 1990s were co-owned with their parents.
Three in 10, or 34.4 per cent, of these co-owned properties were “likely to be mortgage co-signing arrangements,” the report says. Not surprisingly, these rates were higher in Canada’s biggest and most expensive cities: 27.2 per cent in Toronto, and 23.4 per cent in Vancouver.
According to the Canadian Real Estate Association, those looking to buy a home this spring can expect to pay roughly $200,000 more than they would have in 2019, at an average of just under $700,000. House prices are even higher in Toronto – which had an average of $1,156,167 in March – and in Vancouver, where the benchmark is $1,205,800.
Meanwhile, high interest rates mean the mortgage stress test – which requires borrowers to qualify at 2 per cent higher than the rate they are receiving from their lender – now sits at an average of between 7 per cent and 8 per cent.
These numbers make it seem like deep-pocketed parents are the solution to the housing affordability woes of young Canadians. Having Mom and Dad co-sign a mortgage essentially eases the risk profile of the adult child borrower, can get them over the stress test hurdle and even help them qualify for a lower mortgage rate.
But coming to your adult offspring’s financial aid comes with significant risks. If you’re thinking of helping your child buy a home, consider: Is it a financially wise move for you to help out? And are you actually able to afford it? Could doing so put your own retirement at risk, especially if you have multiple children who want to buy a home?
First, be aware of what it means to co-sign a mortgage. This is an arrangement where a second party – typically a family member – is added to the mortgage title, and is responsible for paying off the mortgage in the case the primary borrower fails to do so. In the eyes of the lender, they’re equally and fully liable for those mortgage payments.
The second consideration is income. It may come as a surprise that in order to co-sign a mortgage, parents need to have a source of “unencumbered” income – money that’s not tied up in their own expenses, such as a mortgage or car payments. A common frustration in the mortgage industry are borrowers whose “rich parents” don’t actually have cash flow; funds that are socked away in an RRSP or a paid-off mortgage aren’t helpful here.
On the other hand, parents who are still working, pensions, stocks that pay dividends or rental properties that provide income are applicable sources. In other words, there needs to be a sufficient number on line 15000 on that Notice of Assessment that is not eaten up by the parents expenses.
For many aging parents who are approaching retirement or drawing down from a Registered Retirement Income Fund (RRIF), this can throw a wrench in their plans to co-sign. As well, taking on another full mortgage can impact their ability to take on additional credit should their debt ratios grow too high.
Despite these risks, however, co-signing appears to have become more popular since 2022, when interest rates started to rise. We’ve certainly seen a larger number of these arrangements at our own brokerage.
Looking ahead, co-signing is likely to get even more widespread, as many of today’s existing mortgage borrowers renew their terms amid much higher interest rates. Some of these borrowers may be considering switching to a new lender at this time and are finding they no longer qualify.
Adding a co-signer at this time can be an option, but in many cases, it can be a lot less complicated – and risky – to just stick with your existing lender, who generally won’t re-stress you at renewal.
The bottom line: Co-signing a mortgage puts parents fully on the hook for payments, and can make them financially vulnerable. Whether an investment or act of love, approach with care – and caution.
James Laird is the co-founder of Ratehub.ca and president of CanWise Financial mortgage lender. Penelope Graham is the director of content at Ratehub.ca.