This article has been updated from a previous version.
The one-two punch of high interest rates and ever-increasing home prices has meant that millennials across Canada are having a harder time than ever affording a home.
While many opt to live with their parents, others are turning to their parents for more than just a roof over their heads. According to a 2022 poll conducted by the Ontario Real Estate Association (OREA), about 40% of parents of those aged 18 to 38 who have purchased a home helped their child financially. On average, the financial gifts and loans totalled $71,000 and $41,000, respectively.
A monetary gift is just one way parents can help their children get into the housing market. Agreeing to co-sign their mortgage is another. Recent numbers from Statistics Canada (reflecting 2021 census data) suggest that one in six homes owned by people born in the ‘90s are co-owned by their parents.
But what are the risks to parents who may be putting their financial health on the line to facilitate an adult child’s home purchase — particularly if those parents are already retired?
The hazard of being your child’s co-borrower
No matter how you slice it, a home is one of the most expensive things that a person will likely purchase in their lifetime. As such, co-signing a mortgage comes with enormous responsibility for the co-signer. That’s why lenders vet them just as thoroughly as the primary borrower.
The most common reason young people can’t get approved for the mortgage they want is that they don’t make enough money. Having a parent co-sign the application can add more income to the deal and, ideally, aid the mortgage approval.
But there are risks.
“I don’t think it’s a great idea in theory,” says Ron Butler of Butler Mortgage. “There could be unforeseen consequences. After all, if one party stops paying their share, the others are required to pick up that slack.”
If the kids default on the mortgage, it “could be devastating” for a retiree’s credit and savings, particularly a retiree with modest retirement savings, he adds. And if there have been sizable arrears, or a dip in property values, it’s even worse.
However, says Ross Taylor, a mortgage broker agent with Concierge Mortgage Group and registered credit counsellor, the potential pitfalls of co-signing can be avoided if both parties enter the agreement with a full understanding of the contract.
Related: An inside look at mortgage defaults
Cover your bases when co-signing a mortgage
“Parents can gauge the risks and [they] know their children better than we do,” Taylor says. But he advises that parents should “do their own due diligence and not feel guilted into [co-signing].”
Everyone’s circumstances will be different.
“If they can, and want to, and their kids are clearly good credit risks, are financially responsible, and are not living paycheque to paycheque, then why not?” he says.
It doesn’t always go so smoothly, however. Taylor recalls a file he dealt with years ago in which the client’s son and wife had split up, and the son fled the province.
“The parents were left holding the bag and ended up filing consumer proposals,” he says. “The father told me, in hindsight, they had co-signed against their better judgment.”
While you can’t blame parents for wanting to help their children break into homeownership, co-signing is not a one-size-fits-all solution for getting a mortgage.
In some ways, it is really none of our business,” says Butler. “If family members wish to band together to support one another in purchasing a home, it is their right to do so.”
But for the family’s sake, they should try to cover all their bases when dealing with this very important financial transaction. Basic measures include having a lawyer prepare an agreement to cover various scenarios such as: What happens when the primary mortgage-holder misses a payment? What if the homeowners have a messy divorce? Who is monitoring payments?
Most importantly, the cosigning parents should plan for their exit from the mortgage, and it should happen as soon as the child can qualify on their own. All these details should be in the co-signer agreement contract.
Consider a gift down payment
In some cases, giving your son or daughter a more significant down payment may be preferable to co-signing.
He calls these gifts “living inheritances,” and says they are becoming common.
“They gained momentum in 2017 following the implementation of the stress test.”
OREA’s survey found that while 44% of parents who helped their children purchase a home used their general savings, 7% borrowed money from their home equity line of credit to fund their gift or loan. Another 15% used some of their retirement savings or investments, and 8% took out a mortgage or second mortgage on their own home.
Read next: How much down payment do I need?
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