But in the world of families, finances, marriages and mortgages, there are no guarantees of a happy ending.
“Generosity must be tempered with some careful planning and sound legal advice that take into consideration one’s own future needs. It may sound a bit churlish but family circumstances can change and large family gifts or even loans can get lost in the shuffle,” says Susan Eng, VP Advocacy for CARP, Canada’s largest national advocacy organization for older Canadians (www.carp. ca).
Even before a dime is transferred, the grey areas start. According to Woodbridge, Ont.-based real estate lawyer Morty Shapiro, sometimes the generosity of parents and grandparents ends when the marriage ends. They don’t want an ex son-in-law or daughter-in-law walking off with their mortgage gift. To prevent this, parents ask that their “gift” be registered as a mortgage on the property but with no payments and zero interest rate.
This creates a new set of challenges.
“Sometimes when parents are giving their young married children money to buy a house — and they know that the divorce rate is up to 50% — they want to secure it with a second mortgage,” says Mr. Shapiro. “It’s like a prenuptial. I’ve had some who had no issue with it. They are appreciative of the down payment. I’ve had others in which the daughter-in-law or the son-in-law gets upset,” says Mr. Shapiro.
The problem with registering the gift as a second mortgage is that sometimes the couple has already told the bank that their down payment is “love money.” According to Mr. Shapiro, the bank might ask for a “gift letter” from the parents, which the parents sign. At the same time, they are having the children sign a mortgage. If a dispute arises out of the mortgage, the soon to be ex son- in-law could produce the gift letter and challenge any paying back of the parents’ gift.
Another area of potential conflict occurs when both sets of parents would like to lend the young couple money. This could result in the bank holding a first mortgage, one set of parents holding a second, and the second set of parents holding the third. It is a recipe for trouble. If the property loses value and is sold at a loss, the holder of the third mortgage is likely to be short-changed.
There are ways to mitigate the problems associated with family mortgages. Formalizing the mortgage — even if it’s a gift to be paid back in case of marriage breakdown – is more likely to protect everyone than informal agreements.
“All efforts should be made to ensure that the debt has features comparable to any “commercial loan,” such as an interest rate (albeit perhaps at a preferable rate), payment terms, term of the loan, etc. The greater the extent to which the mortgage resembles that of a commercial mortgage, the less likely that a creditor or [departing] spouse can attack the genuineness and legitimacy of the loan,” says Howard Black, senior partner of the estates group at the Toronto offices of Minden Gross LLP.
