As the cost of Toronto real estate continues to increase, we’ve noticed a trend with more of our first time buyers: buying with the help of mom and dad (a.k.a. the Bank of Mom and Dad). While parental help to buy your first home can make the difference between buying now and renting for another 5 or 10 years, it does come with a price. Below, some tips on the decisions you need to make and the conversations you need to have to make sure the buying process is a smooth one:
1. Are you buying the property as a joint investment with your parents or are they making you a loan/contributing to your downpayment? If it’s a joint investment, make sure you discuss how you will split ongoing costs and any appreciation (or loss in value) when it’s time to sell.
2. Who’s on title? If you need your parents’ help to qualify for a mortgage (if for example, your credit rating isn’t great or your income isn’t high enough), in all likelihood, your lender will want your parents on title too. While your independence may be challenged, it may be the only way to buy that condo. And by the way: many of our clients successfully take their parents off the mortgage and title when they renew their mortgages in a few years time. (Be sure to ask about the idea of making them a Guarantor rather than actually on title.)
3. How much are they lending you and on what terms? The bank of mom and dad can be a great way to increase the size of your downpayment but make sure you’re clear on the terms. Is it a loan or a gift? Are they charging you interest? How long are they lending you the money for? And it’s always good to have a conversation about how a loan will impact their overall say in how you spend your money. Will they charge you guilt? If you owe them $20,000, will they be OK if you decide to run off to Thailand for a month or will they think you should have paid off your loan to them sooner?
4. Negotiate the amount of involvement your parents will have in the decision of which property to buy and where. We’ve seen this go wrong on many occasions – if your parents are giving or lending you money, will they expect to have a say in where you live? If so, make sure to discuss your needs and wants before you fall in love – there’s nothing worse than being ready to make an offer on a hip downtown pad, and then finding out your parents expect you to live a bungalow in the ‘burbs. Will they want to accompany you on showings or just see your final pick? Will they want to be involved in price negotiations or trust you to make the right decisions?
5. If you have a spouse and only one set of parents is contributing, make sure everyone has a conversation about what happens if you split up. Not fun to think about these things, but if your parents contribute $100,000 and your spouse leaves you, does he or she get to keep $50,000 of your parents’ money?
6. What happens if your single status turns to married? If your new husband or wife moves into your home they will get certain rights (it will legally become your marital home). Are your parents OK with that? Will that give mom the right to have a say in who you marry?
7. What happens if your parents change their minds down the road? Maybe their retirement plans change or they fall in love with a cottage they suddenly want to buy. They may want their loan paid more quickly or they may need to get off your title and mortgage in order to qualify. How will you handle this?
8. If you have siblings: are your parents lending them money too? If not, will your brother or sister think they have rights to crash on your couch? (“Mom and dad paid for this – I have the right to use it too!”)
It’s great that the Bank of Mom and Dad has offered to help you with your first condo or house purchase – just make sure to have all the conversations and get everyone on the same page.