Prevent family friction at the bank of mom and dad – Ask a Vancouver Mortgage Broker

Gerry Kahrmann-PNG Entering Vancouver‘s expensive housing market often requires financial aid from parents. Getting the agreement in writing can prevent problems between siblings.
Photograph by: Gerry Kahrmann, PNG Files, Vancouver Sun

A visit to the bank of mom and dad is often necessary when buying a home, but it always pays to use a lawyer when lending money between the generations. Having a legal document that clearly outlines the agreement can help protect the parents, the child, any sib-lings and any spouse or future spouse.

Vancouver lawyer Gail Davies has been doing real estate conveyancing for more than 25 years and she said most often she has clients who are “lending” their children 100 per cent of a home’s purchase price. Usually, they are doing so as an advance on a future inheritance and the money is not expected to be paid back.

But even in that case, having a legal document and probably a mortgage is a good idea, Davies said. A formal mortgage on the property protects siblings, who also stand to inherit from their parents’ estate, and it can also secure the money in the event of a divorce.

“If the child is cohabiting with someone, the person they are cohabiting with could have a claim against the property,” Davies said. If you don’t have a mortgage on the property, you could end up as an unsecured creditor if things don’t work out, Davies said.

“Unsecured creditors are at the back of the line,” Davies said.

Davies used the example of a mother who had given her son money to buy a home, and left the remainder of her estate to her daughter. By the time the mother died, the son had bought a home, married and divorced. In the divorce, he didn’t get the property, so he was left with nothing and couldn’t make a claim on his mother’s estate. If the mother had had a mortgage on the home, the divorcing couple would have been forced to sell the home and repay the money to the mother, Davies said.

Not all first-time homebuyers are so lucky as to have their parents fully fund their home purchase. Other times, parents might be willing to give or lend their children an amount to cover the down payment, or money toward the purchase.

“We see more and more parents helping their son or daughter out with money for a down payment,” said Carolyn Heaney, area manager, mort-gages for Bank of Montreal. “With real estate prices in Vancouver, that’s not far-fetched. If it is truly a gift, we do require a gift letter.”

The letter would need to show that the money is a gift and that no repayment is expected. Secondly, if the money is a loan and not a gift, a bank would factor any necessary payments into their calculations to see if the purchaser qualifies for a mortgage.

The Real Estate Board of Greater Vancouver conducts an informal survey of realtors each month and the results of that survey show between 33 and 40 per cent of all home purchases are made by first-time homebuyers.

First-time homebuyers are most likely to be squeezed by the new mortgage rules brought in earlier this summer, limiting the maximum life of a mortgage to 25 years from 30.

First-time homebuyers are also the most likely to have less than 20 per cent down, which means they will have to pay an extra insurance premium to secure a high-ratio mortgage.

Because of these challenges, and the sky-high prices for Metro Vancouver real estate, many people could not afford to get into the housing market without their parents’ help.

“In this day and age it’s very common for parents to help their children with a down payment as part of their estate planning process,” Heaney said. “Just because they’re getting the money now, the daughter or son shouldn’t be penalized.”

If the money is a loan and is expected to be repaid, there are more than a few things to watch out for when setting it up. For example, if the loan calls for interest payments, the parents must report that interest as income on their tax return, Davies said.

From the child’s perspective it could pay to make sure the mortgage is not set up as a demand loan, but has a specified time period. Davies said she usually recommends 25 years. If it is set up as a demand loan, the parents could demand payment at any time – after a disagreement or if they didn’t like a potential spouse, for example – and if the full payment was not made, they could foreclose, Davies said.

Davies said she would normally charge between $600 and $1,000 to set up the documentation of a loan or a mort-gage between family members.

tsherlock@vancouversun.com Blog: vancouversun.com/yourmoney