Parents have moved beyond helping their children with a down payment, with high home prices and interest rates forcing them to co-sign on mortgages themselves.
For first-time homebuyers, adding their parents’ income on a mortgage application can make the difference between being able to purchase a home or not. But mom and dad should keep in mind the potentially complicated tax and financial considerations related to putting their names on the title, experts say.
High property values and borrowing costs have translated into outsized mortgage payments for prospective buyers. Many young homebuyers are finding their income isn’t high enough to qualify for a loan.
Because of federal regulations, most buyers must show they’d be able to afford mortgage payments based on a qualifying interest rate that is two percentage points higher than the contract rate offered by their bank. Currently, that stress test rate is around 8 per cent.
That’s where parents are now stepping in, said David Larock, a broker with TMG The Mortgage Group. Parents are increasingly co-signing just to help kids pass the mortgage stress test and qualify for a mortgage that they’re capable of paying for on their own at the bank’s contract rate.
Another possibility is becoming a loan guarantor, who is liable for mortgage payments but isn’t listed on title. But it’s more complicated to hold a guarantor with no ownership accountable if the borrower defaults, so lenders generally prefer that parents be on title, he added.
Mom and dad are also more frequently paying part of the mortgage instalments too, said Jason Anbara, an Ottawa-based mortgage agent. In the past, Mr. Anbara said he would often have to suggest to clients that they find a co-signer. Now, many come to him with family agreements already in place.
“People right now are assuming they’re going to need it, knowing that they probably won’t qualify on their own,” Mr. Anbara said.
But co-signing can be complicated, especially when it comes to transferring the house if the children want to sell or if one of the parties dies.
Parents and children can enter a co-sign agreement in two main ways: by signing a joint tenancy, where there are no designated percentages of ownership, or having a tenancy in common, a fractional ownership where even upon death, the party maintains their part of the property in their estate. In tenancy in common, parents could own as little as a symbolic 1 per cent of the property.
Patrick Shing, chair of real estate law at Toronto firm Mills & Mills LLP, says he typically recommends that parents and children enter as joint tenants. Doing so makes it easier for children to take full ownership of the property by way of survivorship when their parents die and avoid going through a potentially lengthy probate, the analysis and transfer administration of estate assets.
“It avoids the need for obtaining probate if it wasn’t already needed,” Mr. Shing said.
If the co-signers were tenants in common, whatever percentage of the property deemed to be theirs would be dealt with in their estate when they die, said Aaron Hector, an adviser with CWB Wealth Management Ltd.
Parents can also sign a Bare Trust Declaration that shows that they are involved to help with financing. This means that they have no interest in the economic benefit of a property, known as beneficial interest. With the Trust Declaration, the parents would not list the house as an asset, and then they also would not owe capital gains tax when they die, Mr. Hector said.
If the child occupied the house in every year it was owned, it would be considered their primary residence and therefore exempt from capital gains taxes if sold. As long as the parents are deemed not to be beneficial owners through a Bare Trust or other agreement, they also would not have to pay capital gains taxes, Mr. Hector said.
But parents who are on title with no beneficial ownership of the property should be aware of tax-filing obligations under the underused housing tax, which came into effect in 2022. While the federal levy is aimed at foreign nationals who own vacant or underused property, tax accountants are warning that the new rules also make it mandatory for many Canadians who hold residential property in trust to file a required return every year. Failure to do so can result in penalties starting at $5,000 for each affected individual listed on title.
Co-signing parents should also keep in mind their kids’ mortgage debt will count as their own on any loan or credit application, mortgage broker Mr. Larock warned. This can limit parents’ ability to borrow for themselves or help their other children who might similarly need a mortgage co-signer, he said.
Still, with proper planning, co-signing can help a young couple buy a slightly bigger home instead of having to settle for one they will soon outgrow, Mr. Larock said.
“It’s to get that last 15 per cent [of home value] that they need in order to get the house they’re going to be happy in for 10 years instead of five years,” he said.