# Pros/cons of home funding approach?



## jtmann (Nov 5, 2009)

Hello:

My fiancee and I are going to start to build a home next year and I have a question about possible approaches and pros/cons related to the financial funding for the home.

Once I liquidate some investments, I will have enough cash on hand to fund the construction of the home. My fiancee will not have enough cash on hand to fund "her half" of the home building cost, although in the next few years her financial position will improve very dramatically/she will become a high income earner (she's currently a med student). 

In order to avoid her having to incur bank mortgage interest to fund her part of the house cost, I am kicking around the idea that I would fully fund the construction of the home next year and then over the years following she would basically pay me in installments as her earning power increases, up to the point where she has recouped me for half the cost of construction.

I know there are several legal issues related to this and we will be ironing those out with a lawyer and a marriage contract. But given this is a financial forum, I thought the folks here might have some thoughts or suggestions to share with me regarding the preceding idea, specifically:

1) What are the pros/cons to me or her from a tax perspective, if any?

2) Can you think of any other ways to get to same place (i.e., avoiding mortgage interest and eventually each "owning/funding" half the home?)

Many thanks for you input!


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## nobleea (Oct 11, 2013)

1) there should be no tax considerations. it's all after tax money. You can call it a gift both ways. Or you can charge the prescribed interest, she pays it, and you claim it as interest income. Seems silly.

2) why so against mortgage interest? it's pretty cheap now. I don't know what you're earning on your current investments, but if it's more (after tax) than the mortgage rate, what's the big deal with paying a bit of mortgage interest? It's either you pay the mortgage interest, or you lose the income/interest/dividends on your investments. Just semantics.


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## Just a Guy (Mar 27, 2012)

I'd also be concerned over the "equality" concerns...I understand them, but a relationship ultimately becomes a partnership...when the tables turn in a few years and she earns more, would you be upset if she felt you weren't pulling your own weight? The seeds of your destruction are usually sown early on...


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## Eclectic12 (Oct 20, 2010)

nobleea said:


> jtmann said:
> 
> 
> > ... In order to avoid her having to incur bank mortgage interest to fund her part of the house cost, I am kicking around the idea that I would fully fund the construction of the home next year and then over the years following she would basically pay me in installments as her earning power increases, up to the point where she has recouped me for half the cost of construction.
> ...


In terms of the arrangement - no. 

However - are the investments being sold in a taxable account? 

If so, selling more to come up with the total amount likely means more capital gains taxes to pay. If there is a reasonable way to spread this across multiple tax years - it would help.





nobleea said:


> jtmann said:
> 
> 
> > ... 2) Can you think of any other ways to get to same place (i.e., avoiding mortgage interest and eventually each "owning/funding" half the home?) ...
> ...


Definitely something to carefully consider ...



Cheers


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## james4beach (Nov 15, 2012)

She's got to borrow money from someone and what you describe there is still a loan from you, even if you don't call it a loan.

If you decide to lend her the money, I suggest you do it with very clear paperwork otherwise you may end up in a situation where it looks like a gift. And perhaps you two break up or she gets angry at you (imagine, a woman getting pissed off at a man!) and suddenly you're in a weird and bad situation.

My financial gut says it's better if she gets the loan from a 3rd party. If she's so opposed to using a mortgage, then how about

 Student line of credit? These rates tend to be insanely low and they love lending to med students.
 Borrow from family? Med students tend to have rich parents, that would be a good solution.


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## james4beach (Nov 15, 2012)

P.S. it may not be as harmless as you think to lend her the money (even if you don't call it a loan)

Similar situation, I had loaned to my girlfriend (student at the time), just a casual loan with no interest or anything. She's an independent woman and it really bothered her that she "owed" me money. We were always on good terms, and still are, and although it didn't get in the way of the relationship it was still something that bothered her and made her feel uneasy, possibly about the relative power situation. It can hang over someone.

I think it's a good idea for her to take the loan from anyone other than you


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## Zeeshanbmerchant (Jan 4, 2014)

If you are considering paying her share and if you are expecting the investments to go up in value

You may decide to sell her the investments now at the current fmv which will mean she will pay the capital gain on any increases

Since she is a student and prob has little or no tax payable and tuition credits you can save on capital gains 


I'd get a common law prenup since you will be living together


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## domelight (Oct 12, 2012)

You stated that she will be making a good income and I suspect you do as well if you can pay for a home.

Google "Non Arm's length Mortgage inside a Self Directed rrsp"

Now go find a good accountant and pay at least a few hundred bucks to get an anaylisis as to the benefits of the mortage in the SDRSP. Their are very specfic rules to be followed

A legal contract with your fiancée will allow her to do the same thing going forward.

I am not a financial advisor in any way, however this is a great stradegy for the right people, with both tax and investment benefits if staged correctly.


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## hystat (Jun 18, 2010)

I don't know your fiancee so this is just a general comment you can consider or dismiss. The success rate from med school is not 100%.


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## Ponderling (Mar 1, 2013)

The other part is tying up a whole whack of your money in a paid of house, custom house to boot it sound like.

Is this an asset that is going to be liquid enough to ever recover costs if you need to sell in a down market?
Don't get too house horny. There are all sorts of places to get a modest return on your assets. canada with a likely slowing and fallign real estate market may pull down everything around you even if you have a great property.

If you hold a big enough position in investments, consider building on the basis of a self directed mortgage for your funds. Then as you pay off the loan, the money goes back to your SDRSP. Yes there are set up and trust fees, but it worked fine for my mortgage for about 5 years until the mortgage got too small and the fees ate into real return too much by that time.


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## nahc (Feb 22, 2011)

Also as a med student she has CaRMS to worry about, and then after that, finding a job. Depending on specialty (this include family medicine in large cities), you may have to move. Buying a house limits your career options as a med student.


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## james4beach (Nov 15, 2012)

That's a good point actually, a med student can really benefit from mobility

Hate to say negative things about your home idea, but perhaps postponing it would have other benefits... not to mention, more money and less need for debt


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## youngdad3 (Jun 29, 2013)

Wow so much negativity on this topic, yes we should all have a plan b but it doesn't have to stop you from moving forward in life. not building a house because SO might not finish med school (did anyone here saw her grades?) or might split up, isn't it too much? I agree though not having a house would be better as for mobility, but I'm sure they already talked about it. Maybe they're planning to start a family?

If I were in your situation I would make her contract a loan from a bank just to keep things simpler. When you'll be in you new home you will probably want to share costs for groceries, home improvements, insurance, etc. At first you will probably do well but in the long run she might feel like she's "enriching" you for giving you let's say 1000$/mth on top of her fair share of expenses. I don't know, it seems like I would feel strange if my GF was paying me back such a large amount of money over such a long time (2yr+).
Also, like others have said, it's not like if mortgage rates were high nowadays ...


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