This article has been updated from a previous version.
According to an Abacus Data poll conducted on behalf of the Ontario Real Estate Association (OREA) in January, 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. 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
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,” Ron Butler of Butler Mortgage tells RATESDOTCA. “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 property values declined,” it’s even worse.
Ross Taylor, a mortgage broker agent with Concierge Mortgage Group and a registered credit counsellor, says co-signing isn’t necessarily a big “no,” as long as both parties enter the agreement with a full understanding of the contract. “Living inheritances” are becoming common, he explains. “They gained momentum in 2017 following the implementation of the stress test.”
In some cases, giving your son or daughter a more significant down payment may be preferable to co-signing. 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.
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.
Butler notes, “In some ways, it is really none of our business. If family members wish to band together to support one another in purchasing a home, it is their right to do so.”
But they need to do it right. Have a lawyer prepare an agreement to cover things such as monitoring payments, what happens when the child misses a payment or if there’s a split-up with a child’s significant other.
Most importantly, parents should plan for their exit off the mortgage, and it should happen as soon as the child can qualify on their own. All of these details should be in the co-signer agreement contract.
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