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With the average Toronto condo selling for $822,000 and the average detached house selling over $2 million in February 2022, it’s no surprise that an increasing number of Buyers are getting help from their parents to fund their downpayment and/or qualify for financing. Which is awesome…except it means they’ll want to be involved. The Bank of Mom & Dad may not charge interest…but it does come at a price.
Below, our tried-and-true tips to make your real estate purchase as smooth and stress-free as possible:
1. How exactly do your parents want to help?
Do they want to:
- Buy the property as a joint investment, splitting any increases or decreases in the value of the property when you sell? With a joint investment, you’ll need to make sure everybody is clear about the % of the home each party owns and how ongoing costs and renovations will be split. How will ongoing costs be split? What about renovations and big repairs? What happens to the ownership of the home if you get married or divorced? When you eventually sell, how will you split the profit or loss? What happens if one of you wants to buy out the other ?
- Loan you money to increase the size of your downpayment. Are they charging interest? What are the repayment terms? Does your mortgage broker know?
- Gift you money to increase the size of your downpayment. Your lender will want to understand where your downpayment came from and will need a ‘gift’ letter from your parents.
- Co-sign on the mortgage. This can help you qualify for a bigger mortgage or make up for issues in your credit history (but it does mean they are taking on your liability too).
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 to get the mortgage you need), your lender will require your parents to be named on title too. While your independence may feel challenged, it may be the only way to buy a property in this hot market. Make sure to ask your lender about what’s involved in removing your parents from the title in the future. Let’s say 5 years from now, when it’s time to renew your mortgage and you can qualify for the full mortgage on your own…what’s the process? What costs are involved? Are your parents comfortable with that?
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 in 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? In the type of property you buy? 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 in 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? Talk to a lawyer and put it in writing.
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!”)
9. Will your parents want to choose your REALTOR?
While Aunt Martha may have 40 years of experience as an agent in Oakville, is she the right person to help you buy a condo downtown? What you want and need in an agent is likely different from what your parents think is important. You can read all about hiring the right agent to help you buy your first home here.
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.