# Personal Mortgage To Son/Daughter



## bariutt (Feb 2, 2013)

I am considering giving a mortgage loan to one of my children. I would like to find some type of form that could be used for this purpose. I would appreciate a form that would be legal in Ontario.

Any other advice would be appreciated as to how to set this up or any pitfalls to avoid.


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## Rusty O'Toole (Feb 1, 2012)

It's best to consult a good real estate lawyer. In the past, I borrowed money from my mother for real estate investments. We had her lawyer prepare the papers, and we set the interest rate at the same as the banks charged. In spite of this, years later, some other relatives tried to prove I had taken advantage. They got no place, but only because I made sure everything was on the up and up to begin with, and could prove it.

There were other situations where older relatives made loans to younger relatives (not me) that did not work out so well. They were forced to take steps to get their money back. In such cases you want all the paperwork to be properly done, and registered at the registry office. I know you are not thinking of such things as power of sale or foreclosure now, and I hope the situation never comes up, but you need to be prepared just in case.


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## Dkogan (May 20, 2017)

*Mortgage*

I am with Rusty on this. You definitely want to have a lawyer draw up the paperwork, perhaps even put a lien on the house, just in case. These things can end up badly. I constantly remind people to re-read King Lear. Some valuable lessons in there.


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## Plugging Along (Jan 3, 2011)

Agree wi the others. You will want a good lawyer and/accountant. If the child is married you will also want some terms to consider if they split.


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## ian (Jun 18, 2016)

Absolutely use a lawyer, draft a mortgage, and have it registered.

We intend to give our son some assistance in buying a home at some point in time. Even though the money will be a gift we will still have a mortgage drawn up and registered. Why? Well, should he decide to have a girlfriend move in with him, and they subsequently split, there could be many issues. If the capital investment is significant this is a good way of protecting you and your child.

Our accountant gave us chapter and verse on this. Just in the process of renewing our wills and the estate lawyer went over all of the reasons (and the reasons vary by province) in the event that we do follow through with this.

Not all goodwill and promises withstand the test of time. Nothing like having it in black and white so that everyone knows exactly where they stand.


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## janus10 (Nov 7, 2013)

ian said:


> Absolutely use a lawyer, draft a mortgage, and have it registered.
> 
> We intend to give our son some assistance in buying a home at some point in time. Even though the money will be a gift we will still have a mortgage drawn up and registered. Why? Well, should he decide to have a girlfriend move in with him, and they subsequently split, there could be many issues. If the capital investment is significant this is a good way of protecting you and your child.
> 
> ...


Does this mean that should your son and his gf split, the portion that you provided to him would be considered an asset coming into the relationship and thus the gf would not be entitled to the prorated? portion of the home equity arising from the personal mortgage?

Would it have made a difference if your son was already in a common law relationship?


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## ian (Jun 18, 2016)

My son was in a common law relationship at the time they were house hunting but that relationship has ended. Our intent at that time was an interest free second mortgage on the purchased property. If it was a small amount we might think twice but we were looking in the range of $150K.

We live in Alberta. Our estate lawyer strongly recommended that we follow this course even though our son is no longer in a relationship because he could well be next week. Who really knows these days?

Both our accountant (a few years ago) and the lawyer (two weeks ago) gave the same reason for going the mortgage route...to protect the capital investment in case of a current or future split up even if the other person was not in the picture yet. Both cited instances where a common law arrangement existed, one party brought vast majority the assets, and when the split came the person who brought no assets to the table, before or during, was claiming half. After a very short co-hab of 18 months. The legal fees can mount up when there is no clear and concise direction in contract.

We paid for good, solid advice and when the time comes we will follow it.

As an aside, I had an uncle in the US who was a very successful businessman. His daughter decided to marry a first year med student. He was a canny Scot who wanted to help his daughter. So....he provided a house for them to live in but did not put it in their names. He put the groom on the company payroll, not his daughter. He paid the SIL's tuition. Six months after graduation the groom walked. But at least he walked with nothing. House was not in his or his wife's name, his wife had a very small income compared to his so no alimony. Many in the family thought the father was being a jerk when if fact he was exercising the caution and following the direction of his advisers. His daughter thanked him for it in the end.


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## AltaRed (Jun 8, 2009)

I agree with everthing said. Everything can and could change. Half of marriages end in divorce, perhaps even more common law relationships. Have a comprehensive mortgage document signed and registered against title. Make sure the foreclosure clauses are as solid as those the banks use because when a relationship goes bad, it all goes bad. You need a way to call the mortgage at the end of its term, e.g. 3-5 years whatever you wish, and to foreclose when the payments are behind.


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## agent99 (Sep 11, 2013)

In the case of a 2nd mortgage like Ian mentioned, presumably the first mortgage holder has first rights and would be the party calling the mortgage. In the case of a foreclosure, isn't there a good chance the 2nd mortgage lender will lose almost everything regardless of how the 2nd mortgage is written?


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## AltaRed (Jun 8, 2009)

agent99 said:


> In the case of a 2nd mortgage like Ian mentioned, presumably the first mortgage holder has first rights and would be the party calling the mortgage. In the case of a foreclosure, isn't there a good chance the 2nd mortgage lender will lose almost everything regardless of how the 2nd mortgage is written?


Not necessarily if house value exceeds* the sum of the two mortgages (which is usually the case, certain RE downdrafts notwithstanding). Foreclosures typically happen due to arrears in payments. 

* Might think twice in GTA and GVA these days. I wouldn't dare hold a 2nd mortgage in either of those two areas.


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## ian (Jun 18, 2016)

No question, I would be behind the first mortgage but ahead of everyone else. And I would have paperwork. Sure there is always risk but ultimately our son will inherit so there is it is not a big deal.

Yes, there is always the down payment and prices may increase. We have two goals. We want to get him over the 20 percent equity mark so that he does not have to pay mortgage insurance. The insurance companies are rich enough without his money.

Secondly, we want to protect him in case he does co-habit/marry and then splits up. We don't want the money back, we simply want to protect him from the impact of future events.

Fortunately real estate in Calgary has been stagnant. Single family homes are showing signs of life. Prices have been constant for four years. Condo's are in the dumpster....notwithstanding the wonderful pronouncements of the Calgary Real Estate Board!


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## agent99 (Sep 11, 2013)

AltaRed said:


> Not necessarily if house value exceeds* the sum of the two mortgages (which is usually the case, certain RE downdrafts notwithstanding). Foreclosures typically happen due to arrears in payments.
> 
> * Might think twice in GTA and GVA these days. I wouldn't dare hold a 2nd mortgage in either of those two areas.


It's good that Ian is helping his son out, doesn't need the money back and is in a hopefully recovering depressed market.

Regarding foreclosures - That can easily happen. Loss of job. Poor financial management. Where we live, the housing market is very stable. Yet, the house next door was foreclosed and sold on a Power of sale. It went for about 50% of market value. Owner was a physician! Same thing happened with next owner! 

Need for a second mortgage from relatives can mean that funding is not available through normal means. So that money is at higher risk. Each case is of course different.


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## mark0f0 (Oct 1, 2016)

agent99 said:


> It went for about 50% of market value. Owner was a physician! Same thing happened with next owner!


Correction: The market dropped by 50% from you previously perceived it to be. A transaction in the market is, by definition, an observation of "market value". An asset can never transact between two arms-length entities without being at a 'market' price.

And on the topic of this thread, technically, its the borrower that "gives" the mortgage to the lender. The CRA insists that loans (including those secured by a mortgage) between non-arms-length entities (ie: father and son, for instance) be done at "fair market value". So an interest-free mortgage would be problematic. A legitimate planning concern is the fact that taxes would have to be paid on the mortgage interest, and may impact OAS/drug plan/etc. eligibility. Some careful planning needs to be undertaken in light of such. Also, an Estate would be expected to include such mortgage in the valuation of assets for Probate, and may incur capital gains or losses on a mark-to-market adjustment of the loan's value at the time of death.

One strategy you could consider would be an Islamic-finance-like concept where instead of lending the money to the son to buy the house, you buy the house with him, at a certain percentage of ownership (Sharia law forbids debt!). And then gradually transfer the equity to him over time, participating in the upside or the downside of RE. With the "Capital Gains Reserve" mechanism, you can even structure this over a number of years at a price you agree upon up-front. You do not need to be Muslim, or adhere to Islam or Sharia in order to take advantage of this concept.


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## Mukhang pera (Feb 26, 2016)

agent99 said:


> In the case of a 2nd mortgage like Ian mentioned, presumably the first mortgage holder has first rights and would be the party calling the mortgage. In the case of a foreclosure, isn't there a good chance the 2nd mortgage lender will lose almost everything regardless of how the 2nd mortgage is written?


The first mortgagee is not likely to "call the mortgage" or be in a legal position to do so if the first mortgage is in good standing. It would be unusual (and of doubtful enforceability) for a first mortgage to contain a provision making a default under a subordinate charge a default under the first mortgage. A first mortgagee has little interest in the state of accounts between junior encumbrancers and the borrower.

Here, the OP simply speaks of a plan to lend by way of a mortgage to a child. We are not told if it will be a first and only mortgage or what. My guess is that it will be a first charge and some of the potential pitfalls with subordinate charges will not arise. Otherwise, certain provisions should be included in any second mortgage to ensure the position of the second mortgagee is recognized and protected. The basic issue with any mortgage registered subsequent to a prior mortgage is that the interest created by the mortgage may terminate or be lost if the prior mortgagee terminates the interest of the mortgagor. In case of a solicitor representing a client as a second mortgagee certain procedures should be adopted:
• obtain and review the prior charges;
• obtain written confirmation of the status of the prior charge from the prior mortgagee; confirm balance owing and in good standing;
• inform client fully as to when prior charge is due and discuss all essential and unusual terms of the prior mortgage and the ramifications;
• add certain clauses to the mortgage document to identify it as a second mortgage and provide protective measures for client:
• provision for second mortgagee to cure defaults under the prior mortgage if mortgagor is in default;
• provision that default under the first mortgage is a default under the second mortgage;
• a priority clause.

Those are but a few considerations, without delving into potential matrimonial/common law partner complications. The OP has asked to be directed to "some type of form that could be used", so it seems unlikely that any of the advice given in this thread will be taken very seriously. The OP is apparently seeking a quick and dirty inexpensive solution to a situation does not lend itself to that approach.


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## mark0f0 (Oct 1, 2016)

Mukhang pera said:


> Those are but a few considerations, without delving into potential matrimonial/common law partner complications. The OP has asked to be directed to "some type of form that could be used", so it seems unlikely that any of the advice given in this thread will be taken very seriously. The OP is apparently seeking a quick and dirty inexpensive solution to a situation does not lend itself to that approach.


Leaving aside all the potential tax implications, esp. dealing with non-arms-length borrowers, estate planning considerations, and asset shielding considerations, would there be a serious problem with simply going to the website of one of the major mortgage lenders such as RBC or CIBC, downloading their mortgage charge documents, replacing RBC or CIBC with the lender's name, and inserting the name of the borrower? 

I think most of what you address in your post is dealt with in such standard mortgage documents freely downloadable.

I personally don't like the idea however as a mountain of tax will have to be remitted to the CRA on what should be simply an intra-family transfer of wealth. If that's the goal here. The (Islamic finance) method I described would seem to be far more tax efficient.


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## agent99 (Sep 11, 2013)

mark0f0 said:


> Correction: The market dropped by 50% from you previously perceived it to be. A transaction in the market is, by definition, an observation of "market value". An asset can never transact between two arms-length entities without being at a 'market' price.


Sorry - You have no knowledge of the situation and your 2nd/3rd sentences are nonsense.


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## agent99 (Sep 11, 2013)

Mukhang pera said:


> The first mortgagee is not likely to "call the mortgage" or be in a legal position to do so if the first mortgage is in good standing. It would be unusual (and of doubtful enforceability) for a first mortgage to contain a provision making a default under a subordinate charge a default under the first mortgage. A first mortgagee has little interest in the state of accounts between junior encumbrancers and the borrower.


I don't think I said anything like that! If the home owner defaults or looks like they might, the first morgagee may very well call the mortgage. Legalese written into the 2nd mortgage then doesn't help much, does it?


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## mark0f0 (Oct 1, 2016)

agent99 said:


> Sorry - You have no knowledge of the situation and your 2nd/3rd sentences are nonsense.


Not at all. You're the one trying to rationalize a market transaction as being 'below market'. Which is complete nonsense unless we're talking about non-arms-length entities. Just because an asset didn't sell for what you 'think' it was worth, doesn't allow you to simply claim that the price was invalid and not reflective of "the market". "The market" and "market pricing" is a question of fact, not of personal opinion.


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## ian (Jun 18, 2016)

The lawyer said to do a normal second mortgage with a 0 percent interest rate. One that can be 'called' at any time. Don't know any other details other than it will be like any other second mortgage. She says no tax implications.

Clearly if the house is sold under order from the first mortgagee there probably will be nothing left for the second. But that is not my issue. This is a gift. The mortgage would be there to protect my son or daughter.


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## Mukhang pera (Feb 26, 2016)

agent99 said:


> I don't think I said anything like that! If the home owner defaults or looks like they might, the first morgagee may very well call the mortgage. Legalese written into the 2nd mortgage then doesn't help much, does it?


My point here agent99 is that, if there are 2 mortgages registered against the title, particularly if there is likely to be a deficiency on a sale in foreclosure proceedings, many borrowers will default on the second charge, while keeping the first in good standing. Sometimes in hopes of finding a way to re-finance or otherwise pacify the second mortgagee. 



agent99 said:


> If the home owner defaults or looks like they might, the first mortgagee may very well call the mortgage. Legalese written into the 2nd mortgage then doesn't help much, does it?


"Looking like" one might default is not usually written into a mortgage as an act of default. There must be an act of default in order for a mortgagee to invoke the acceleration clause and demand full payment. As a practical matter, a typical first course for a mortgagee to take when a payment has been missed is to send out a "friendly reminder" to make the payment. Lenders would generally simply prefer to be paid and will encourage a default to be rectified before pulling the plug. There is not a lot of money to be made for lenders getting into the foreclosure business. On other hand, that segment of the bar engaged in security taking and security enforcing can eat fairly well off foreclosures in hard times. I recall a time when Vancouver was known to Vancouver chambers judges as "foreclosure city". It was a prosperous time for those of us doing security enforcement. But then, even with mortgage 
terms providing that a mortgagor in default must pay the mortgagee’s legal costs “as between a solicitor and his own client” - a term seldom enforced anymore - foreclosures were seldom a profit center for lenders.

As for legalese in the second mortgage, it won’t do much to remedy sloppy lending practices. But otherwise, if well-drafted and with a strong personal covenant, it can sometimes save the day. But again, any lender would prefer not to have to rely on a personal covenant and should only lend on terms that will ensure there will be adequate (and _available_) security in the land even in a worst-case scenario. 

Today, lending in a place like Vancouver, I dare say that if a property to be mortgaged appraises at $2 million, it would be imprudent to see it encumbered for more than about $1.4 million, which might be a realistic selling price down the road. In Vancouver in the early 80s, property prices were reduced by half from their high by the time the prime hit 22.75%, and there’s no law that says that history cannot be repeated.

I should add that a risk inherent in second mortgages is that a prior charge holder _will_ call in its security. The subsequent mortgagee runs the risk that prior mortgagees may foreclose or sell the property. In order to preserve its security, the subsequent mortgagee may have to redeem the prior mortgages or take foreclosure proceedings itself. The subsequent mortgagee may then have to advance more money than it had contemplated or was prepared to lend in the first place.

There is also the risk that the liability of the second mortgagee will be ousted by "tacking", the liability to foreclosure by a prior mortgagee, and problems arising from the doctrine of consolidation. When the first mortgage secures a running account, there are additional problems. 

Under certain circumstances, a prior lender may make further advances of money after the registration of a second mortgage and still have priority for repayment of that money. For example, the lender with a first mortgage for $100,000 providing for advances and re-advances may have advanced $50,000. A second lender advances another $50,000 on the security of a second mortgage. If the second lender has not given notice of the registration of the second mortgage, then the first lender might advance another $50,000 and still have the priority of the first mortgage for repayment of that money.

In B.C., if a prior mortgage was made before October 31, 1979, or specifically preserves the doctrine of consolidation (Property Law Act, s. 31(2)), the prior mortgagee may be in a position to consolidate its mortgage with other mortgages in its favour secured on other property of the borrower. The principle underlying the doctrine is that it would not be fair to permit a borrower to redeem a mortgage of, for example, $50,000, on the security of property worth $60,000 and not also redeem another mortgage of $60,000 on the security of a property worth $50,000. According to the doctrine, the first mortgagee may (since it is an equitable remedy) be in the position to require a subsequent mortgagee who wants to redeem the first mortgage to repay not only the money due under the first mortgage, but also the money due under “consolidated” mortgages. If the doctrine applies to a mortgage, a subsequent mortgagee needs to know if there are now other mortgages and if there may be other mortgages in future or, preferably, if the prior mortgagee will delete reference to the doctrine.

Of course, I might just be wasting my time here outlining some considerations in mortgage lending, particularly when one is not contemplating a first charge. As has been said:



mark0f0 said:


> I think most of what you address in your post is dealt with in such standard mortgage documents freely downloadable.


It's reassuring to know that there are freely downloadable documents that come with detailed legal advice, including the operation of legal principles such as tacking, marshalling and consolidation.


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## mark0f0 (Oct 1, 2016)

ian said:


> The lawyer said to do a normal second mortgage with a 0 percent interest rate. One that can be 'called' at any time. Don't know any other details other than it will be like any other second mortgage. She says no tax implications.


Not going to pass the CRA smell test. A second mortgage has a fair market interest rate quite in excess of the rate on a first mortgage. Find a competent lawyer as well, BTW, not one that advocates tax evasion.



> Clearly if the house is sold under order from the first mortgagee there probably will be nothing left for the second. But that is not my issue. This is a gift. The mortgage would be there to protect my son or daughter.


Seriously look into doing a transaction in equity instead. There should be some way of doing so without being severably liable on the first mortgage.


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## agent99 (Sep 11, 2013)

mark0f0 said:


> Not at all. You're the one trying to rationalize a market transaction as being 'below market'. Which is complete nonsense unless we're talking about non-arms-length entities. Just because an asset didn't sell for what you 'think' it was worth, doesn't allow you to simply claim that the price was invalid and not reflective of "the market". "The market" and "market pricing" is a question of fact, not of personal opinion.


Sorry, not worth responding to.


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## mark0f0 (Oct 1, 2016)

agent99 said:


> Sorry, not worth responding to.


Don't like the truth? There is no such thing as a "below market transaction" unless the people on both sides of the transaction are not at arms length dealing.

So your claim of those transactions being 50% below market is complete and utter nonsense.


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## OnlyMyOpinion (Sep 1, 2013)

Not applicable here, but just to note another approach -quite a few years ago now we purchased a house near the uni our son was going to attend. Daughter later used it for college as well (which wasn't originally planned). Lawyer at the time suggested putting ownership in both children's names jointly. That way the bite was reduced to 25% in the event that one partnered up, broke up and then faced a claim from their ex-partner (even though they shouldn't have a basis for the claim).


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## Mukhang pera (Feb 26, 2016)

mark0f0 said:


> Not going to pass the CRA smell test. A second mortgage has a fair market interest rate quite in excess of the rate on a first mortgage. Find a competent lawyer as well, BTW, not one that advocates tax evasion.


Not sure that an interest-free loan to a family member has to bear interest. What I understand is this: If the loan is to purchase an income-earning asset, then interest must be at not less than the CRA prescribed rate. The attribution rules do not apply to loans that bear interest at the prescribed rate, set quarterly by the CRA, that approximates short-term T-Bill rates. If you loan funds to your spouse or child and the funds are invested so that the rate of return is higher than the prescribed rate, the excess income will be taxed in their hands.

If the loan is for a house (not intended as an investment property) then it may be interest-free. However, the CRA does not like it when interest is capitalized to give an appearance of an interest-free loan. For example, the loan agreement says $110,000 is be loaned at 0% interest, but only $100,000 is advanced, while $110,000 must be paid back at the end of one year.


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## ian (Jun 18, 2016)

I have been advised that there are no tax consequences.

This is NOT an investment or income generating property.


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## agent99 (Sep 11, 2013)

Mukhang pera said:


> "Looking like" one might default is not usually written into a mortgage as an act of default. There must be an act of default in order for a mortgagee to invoke the acceleration clause and demand full payment.


What I was thinking about, was a situation where the mortgage and a subsequent HELOC are from the same financial institution. The homeowner starts to miss interest payments on HELOC due to being out of work, for example. Would the mortgagee not perhaps look at the capability of the client to make payments and be able to call both the HELOC and the Mortgage? 

In cases of foreclosure, it seems that the mortgagee is sometimes satisfied to _quickly_ recover just whatever is owing to them plus costs. I realize there are laws in Canada to prevent this, but they differ from province to province. We saw cases here in Ontario where the home was sold at much less than expected even before the For Sale sign went up! 

But we are off-topic. Ian appears to have done his homework and seems comfortable in helping his son out. Hope it goes well Ian.


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## Mukhang pera (Feb 26, 2016)

agent99 said:


> But we are off-topic. Ian appears to have done his homework and seems comfortable in helping his son out. Hope it goes well Ian.


Agreed. Seems that Ian has his ducks in a row and all is well.


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## tygrus (Mar 13, 2012)

You are sheltering your kids big time from the big bad world. Its a good healthy learning experience having to deal with a bank. 

I suggest gifting them the downpayment instead, and let them grow up.


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## Nelley (Aug 14, 2016)

tygrus said:


> You are sheltering your kids big time from the big bad world. Its a good healthy learning experience having to deal with a bank.
> 
> I suggest gifting them the downpayment instead, and let them grow up.


Maybe it isn't a conscious choice, but the whole thread seems about controlling your children permanently.


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## OnlyMyOpinion (Sep 1, 2013)

tygrus said:


> You are sheltering your kids big time from the big bad world. Its a good healthy learning experience having to deal with a bank.
> I suggest gifting them the downpayment instead, and let them grow up.


I think there is still a mortgage involved here. So son should still get to learn first-hand why paying off debt is a good thing and why investing in banks an even better thing.

In any event, for responsible children, I think there are still lots of opportunities to learn about the big bad world without starting life indebted to the eyeballs. But I know there are contrasting opinions on this approach to helping them out.


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## OnlyMyOpinion (Sep 1, 2013)

Nelley said:


> Maybe it isn't a conscious choice, but the whole thread seems about controlling your children permanently.


Permanently? You must be thinking of the thread where I proposed setting up a testamentary trust so my rotting arm could reach up from the grave after death and give those kids a good swift slap on the head? :biggrin:


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## Rusty O'Toole (Feb 1, 2012)

There is another way to help your child buy a house that does not involve a second mortgage.

That is to buy the house as partners. Here is how it would work.

You put up the down payment of 25% of the value of the property. This, plus your hopefully superior credit rating, allows you to get a conventional bank mortgage at the most advantageous terms.

The agreement is that your child lives in the house, does all repairs, pays all mortgage payments, taxes, and other bills.

The silent partner (you) is on the deed as half owner of the property but collects no payments and no rent unless the property is sold. In that case you are entitled to your original down payment back, and 50% of any profit made on the sale.

So, child gets into a nice house with no down payment and a minimal monthly first mortgage payment, and no second mortgage. He or she, and family, enjoy living there with minimal investment.

Parent gets a good real estate investment as they own 50% of the property for a payment of 25% down payment. They get no income, on the other hand they have no expenses and no tenant hassles.

If you wish you could write it into the deal that if the house is not sold sooner, at the end of 10 years it will be appraised, and the silent partner paid back his down payment plus his half of the profit. This should not be a problem as the young people will easily be able to get a larger first mortgage based on the new higher value of the property.

There are other details to it, if you want to do this you should consult your lawyer and accountant. But it seems a very good, very safe way to help someone get a nice home, and have a hassle free real estate investment at the same time.


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## Mukhang pera (Feb 26, 2016)

Rusty O'Toole said:


> The silent partner (you) is on the deed as half owner of the property but collects no payments and no rent unless the property is sold. In that case you are entitled to your original down payment back, and 50% of any profit made on the sale.
> 
> So, child gets into a nice house with no down payment and a minimal monthly first mortgage payment, and no second mortgage. He or she, and family, enjoy living there with minimal investment.
> 
> ...


A nice idea in some ways. But then the parent ends up with a capital gains tax issue, should the property value appreciate by the time of an eventual sale (or expiry of the 10-year or whatever period) and the kid loses the ability to receive the full appreciation in value as a tax-free capital gain.


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## ian (Jun 18, 2016)

We have no desire to have our names on the title. And we certainly do not want to have capital gains flowing from the arrangement since it is really a gift.


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## tygrus (Mar 13, 2012)

Paying your parents is not the same as paying a bank. Doesn't matter who holds the title. Too easy to say dad, we had a little emergency, can we skip a payment?

And you are going to have no credit history borrowing from parents. Credit history helps with everything including the rates you get on insurance, car loans, even possibly employment.

And what happens when your son or daughter gets married or divorced. You will be right in the middle of an equity fight.


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## ian (Jun 18, 2016)

This would be a zero interest second mortgage, no payments required. On demand-but only if there is a relationship breakup. Not looking for interest, payments, anything like that. Just protecting a child in the event of a relationship breakdown. It is really quite straightforward.


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## Mukhang pera (Feb 26, 2016)

ian said:


> This would be a zero interest second mortgage, no payments required. On demand-but only if there is a relationship breakup. Not looking for interest, payments, anything like that. Just protecting a child in the event of a relationship breakdown. It is really quite straightforward.


If the transaction were occurring in British Columbia, I would not admit to anything said in the above quote. It makes it appear that the "loan" is in fact a gift, subject to divestiture in the event of a relationship breakdown. That smacks of a sham - a device to defeat what otherwise might be the wife's lawful claim.

Some recent B.C. law states some of the principles (the numbers in square brackets are paragraph numbers in the judgment, url provided below):

[54] A mortgage is an interest in property conferred by a borrower on a lender to provide a fall-back if repayment obligations are not met.

[56] A gift is a gratuitous transfer of property for which the donor expects no remuneration. By its nature, once a gift is given it cannot be revoked by the donor: V.J.F. v. S.K.W., 2016 BCCA 186 at para. 49. The key factor for consideration in identifying a gift is the actual intention of the donor when the interest in the property is transferred.

Hsieh v. Lui, 2017 BCCA 51

http://www.courts.gov.bc.ca/jdb-txt/ca/17/00/2017BCCA0051.htm

15] When spouses divorce, parents of one frequently say that any money they gave during the marriage was either a loan or a gift to only their daughter or son, with no intention to benefit the other spouse. Because those recollections are naturally coloured by the subsequent divorce, the court must look to the circumstances and intentions at the time the money was advanced.

Madruga v. Madruga, 2015 BCSC 1605

http://www.courts.gov.bc.ca/jdb-txt/SC/15/16/2015BCSC1605.htm

As suggested by the case first cited above, "by its nature, once a gift is given it cannot be revoked by the donor". Here, a demand loan is being papered, to be used only as a tool to revoke what is otherwise a gift, which, by its nature, becomes absolute upon passing. That might be legitimate in the province where this will take place, although that is a doubtful proposition.

"A mortgage is an interest in property conferred by a borrower on a lender to provide a fall-back if repayment obligations are not met." Here, any repayment obligation is a fiction.


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## marina628 (Dec 14, 2010)

Recently we spoke to our bank about do a mortgage with our oldest and also our lawyer ,we would put 20% down to avoid the CMHC fees but only own 1% of the property to avoid any capital gains issue.All we want is our money back if it sells.


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## mark0f0 (Oct 1, 2016)

marina628 said:


> Recently we spoke to our bank about do a mortgage with our oldest and also our lawyer ,we would put 20% down to avoid the CMHC fees but only own 1% of the property to avoid any capital gains issue.All we want is our money back if it sells.


So you gifted the other 19% to the son? Or did you take a 2nd mortgage for the other 19%? What is the nature of your recourse should your son, for example, have a legal claim against him (divorce, lawsuit, professional negligence, personal injury, etc., etc.)? 

That's what we're trying to discuss here -- methods by which one can efficiently and legally protect an interest in an investment in downpayment funds advanced to a relative. With or without a first-mortgage backed lender being involved. 

The whole concept of whether its a good idea, at least for the moment, probably should be left to another thread in which RE valuations are discussed.


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## marina628 (Dec 14, 2010)

We have not bought a property yet but the document we will do at lawyer is stating our investment and would be payable if property sells and at the bank we need to go on title to get the mortgage approved.The bank said we only have to show 1% ownership.My brother in law did this 11 years ago for his son and when it sold after divorce he got exactly his down payment back ,first mortgage was paid out and the couple split rest.Protecting my down payment from future relationship troubles are also first on my mind and helping my kid is second  We just got the pre approval done about a month ago and actively searching with hopes to buy before end of July.


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## mark0f0 (Oct 1, 2016)

marina628 said:


> We have not bought a property yet but the document we will do at lawyer is stating our investment and would be payable if property sells and at the bank we need to go on title to get the mortgage approved.The bank said we only have to show 1% ownership.My brother in law did this 11 years ago for his son and when it sold after divorce he got exactly his down payment back ,first mortgage was paid out and the couple split rest.Protecting my down payment from future relationship troubles are also first on my mind and helping my kid is second  We just got the pre approval done about a month ago and actively searching with hopes to buy before end of July.


Did you manage to avoid severable liability on the mortgage? ie: was your liability limited to the amount you invested, or could the bank have claimed all of it from you. I presume as owner (even 1% owner), you had to sign for the loan as well.

In my mind, that's the big issue for a retiree or near-retiree; if the RE market falls significantly (or the house is destroyed in a non-insured manner), suffering a loss on the downpayment funds advanced (but not 'gifted') to the kid is one thing if the eventual outcome is a default, but at what point does the liability end?


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## marina628 (Dec 14, 2010)

I am helping my kid not a stranger so for myself in my current financial situation and age I find many of these concern irrelevant to myself.The reason we are going on the mortgage is to qualify for a larger property ,larger being 1000sq ft town house instead of a 600 sq ft condo  We can hold the entire mortgage ourselves if we wanted to but I have confidence in my child and their income is stable and growing.But to answer your question yes we can be held liable for everything but I rather take that situation than put down $120,000 and lose it to a future relationship breakup.


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## Rusty O'Toole (Feb 1, 2012)

Mukhang pera said:


> A nice idea in some ways. But then the parent ends up with a capital gains tax issue, should the property value appreciate by the time of an eventual sale (or expiry of the 10-year or whatever period) and the kid loses the ability to receive the full appreciation in value as a tax-free capital gain.


How good do you want it? Where else are you going to find a safe hassle free real estate investment that instantly doubles your money? Where do you find these tax free capital gains? I would love to hear your suggestion.


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## Mukhang pera (Feb 26, 2016)

Rusty O'Toole said:


> How good do you want it? Where else are you going to find a safe hassle free real estate investment that instantly doubles your money? Where do you find these tax free capital gains? I would love to hear your suggestion.


Not sure why my comment set you off. It was in no way provocative and appears to be wholly in harmony with the OP's thinking, as illustrated in his subsequent post:



ian said:


> We have no desire to have our names on the title. And we certainly do not want to have capital gains flowing from the arrangement since it is really a gift.


He agrees with me that he does not wish to attract a capital gain and wants the capital gain to accrue to his son. And THAT is where I find the tax-free capital gain. If the parent receives a capital gain from putting money into the house, it's taxable. If the son lives there and it's his principal residence (as appears to be the intention) the whole of the gain on disposition of his principal residence will be tax exempt. 

So Rusty, I hope you loved receiving this "suggestion". Now, for my part, I would love to hear how your suggested approach, with the parent going on title, results in "a safe hassle free real estate investment that instantly doubles your money". The instant doubling of money is tantalizing. How does it happen?


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## twa2w (Mar 5, 2016)

One point that has not been brought up yet is that some provinces (Ont is one IIRC) require any mortgage on title must contain an interest rate. 
Not sure what the legal issues are if interest payments are then not made and documented. Most lawyers will recommend a nominal interest rate such as 0.1% and that a cheque be paid every year with appropriate receipt issued.


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