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Dad, can I have some money?

Helen Morris
National Post
Saturday, July 31, 2010

While helping a child buy a home is noble, your first priority should be you

Buying a first home can be pretty stressful and will likely impose a fairly hefty financial burden on the purchaser.

Many parents and grandparents may be tempted to lend or give money for a deposit or even act as a guarantor or co-signer for a mortgage in order to try to ease the financial pressure on their offspring. Financial advisors urge them to look at the bigger picture before becoming entangled with a family member's money matters.

"The first question ought to be can you afford it? Most Canadians are not adequately prepared for their own retirement, so if you're a typical Canadian parent, you probably need to do some kind of assessment," says Jonathan Sceeles, a Toronto-based financial planner with Edward Jones. "See whether or not you really can afford it and how deep an impact it will have on your retirement."

If you decide you can afford it, you can lend or give money to cover all or part of the deposit.

"I'm seeing an increase in immediate family members gifting funds [for the deposit]," says Kim Gibbons, a broker with Mortgage Intelligence in Toronto. "What's required from a mortgage standpoint is a gift letter ... a template that has to be completed by the person who is giving the money and by the person who is getting the money."

Ms. Gibbons says often parents will help out to enable their offspring to make the minimum 5% down payment on a mortgage. The lender needs to know that the gift of money is genuine and will not be reneged upon once the mortgage application has been approved.

"A gift [for the deposit money] is better than a loan," says Mr. Sceeles. "A complication of lending the money is that the Canada Mortgage and Housing Corp. (CMHC) is going to consider that to be what's called a 'flex down' situation, where they won't qualify for the normal CMHC insurance rate. They will have to pay a surcharge because a portion or all of the down payment was borrowed."

Of course a gift is just that, a gift. Think twice about whom you may be giving it to.

"If a parent were to give their child $100,000 to buy a home," says Myron Knodel, a tax and financial planning expert at Investors Group, and "should that child go through a marriage breakdown, the equity in that home would be split evenly between the two parties, regardless of where the money came from, so now you have $50,000 leaving that family unit."

Mr. Knodel says lending the money may help keep your investment in the family if your child gets divorced, but it is nevertheless crucial to consult a lawyer as there are limitations on forcing repayment of a debt, particularly if the loan was informal in nature and regular payments were not made.

Helping with the deposit is one thing, but getting more deeply involved requires very careful financial and legal consideration.

"If you're adding your immediate family on as a guarantor or a co-signer," says Ms. Gibbons, "it's because of one of two things: Your income is not good enough to qualify on your own or your credit [rating] has some problems."

If the parent is a co-signer or guarantor, they are liable for the mortgage payments if the child defaults. A co-signer is also on the title of the property, so with all the potential for issues down the road, Mr. Knodel suggests checking with a lawyer about implications for first-time buyer help, removing yourself from title in the future and inheritance issues.

If you plan to co-sign for several children, Mr. Sceeles says, you should be aware of new CMHC rules that prohibit you from qualifying for a high ratio 5%-down mortgage if you own more than two properties; the second and third and so on are considered investments, so 20% down would be required.

"Don't try to get around those new mortgage qualifying rules -- they're there ... to protect people from default, from financial ruin," says Mr. Sceeles. "Don't try to sidestep them by faking your involvement in your child's home purchase."

Posted on Tuesday, August 3, 2010 at 05:24PM by Registered CommenterElaine in | CommentsPost a Comment | References1 Reference

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