With Toronto in the midst of a housing crisis and mortgage rates rising, people are increasingly turning to the support of their parents and/or relatives to help them obtain a down payment to purchase a home.
Parents/relatives frequently want to give a gift or loan to assist their children or family members in purchasing a home. However, this assistance can become an issue if that child separates from their spouse or partner. To protect this investment, there are a series of steps that can be taken before the home is purchased to ensure there is no ambiguity regarding the nature of the funds if the child’s relationship were to break down in the future. Additionally, it is important to consult a family law lawyer to ensure that funds given towards the home are best protected from potential family law claims in the event of a relationship breakdown.
1. Determine if the money is a gift or loan upfront
The difference between a gift and loan is that a gift has NO expectation of repayment. If there is any expectation of repayment, these terms must clearly be identified in a legal document prior to advancing the money to the child.
If the parents/relatives advancing the money do not want the child’s spouse/partner to benefit from a gift, consider structuring the transfer of money as a loan. Courts are reluctant to identify an advance from parents/relatives as a loan unless there is proof that there is a promissory note or loan document prepared contemporaneously with the purchase of the home. Therefore, without that formal document in place, it is likely that any money given towards the home will be treated as a gift.
2. If the money is a loan, all the parties should enter into a promissory note and/or mortgage agreement
Parents/relatives can choose to sign a promissory note or enter into a mortgage agreement with the child and their spouse/partner. If the spouse/partner is not a party to the promissory note and/or mortgage, they may not be liable for repayment if the relationship breaks down.
A promissory note has the effect of capturing in writing the terms under which money is being given and any conditions relating to the repayment of funds. Even if the parents/relatives do not intend to call in the loan, the promissory note clearly lays out the conditions of the money’s repayment.
Parents/relatives advancing funds towards a house also have the option of formally registering themselves as a mortgagee/creditor on the property. Registering a mortgage is a definitive way of ensuring that there is no uncertainty regarding the nature of the loan. However, as a mortgage is a formalized debt against the property, the child’s credit score and/or ability to secure additional financing in relation to the home or other credit products could be affected in the future because of this mortgage.
3. The child should enter into a marriage contract or cohabitation agreement with their spouse or partner
Even if the parties sign a promissory note, other loan document or formally register a mortgage regarding the loan for the home, it is best practice for the child to also enter into a marriage contract or cohabitation agreement with any current or future spouse/partner before they begin cohabitating.
The marriage contract or cohabitation agreement allows the child and their spouse/partner to establish the method for dividing assets upon a relationship breakdown, including how the money from parents/relatives will be treated when it comes to property division. In addition to protecting the gifted or loaned money, the preparation of a marriage contract or cohabitation agreement is a great opportunity for couples to discuss and address their position on other family law issues such as spousal support, ownership of the matrimonial home or cohabitation residence and the division of other property.
If you are a parent or relative who wants to gift or loan funds to your child to assist with the purchase of their home or you are someone who anticipates receiving funds from family to purchase a home, please contact the knowledgeable family lawyers at Mills & Mills LLP at 416-863-0125 or via email to assist you.