10/08/2017New Partnerships and Protections for Canadian Homeowners
According to the Canadian Real Estate Association, the average house price in Ontario in 2016 was $709,825, with an average mortgage payment of $2,927. The required income to buy an “average” 2016 home in Toronto was $128,746.
The discrepancy between the average buyer’s income and the cost of home ownership has many individuals looking for alternatives to traditional home ownership. A key advantage of co-ownership is financial, but there are many factors to consider in such an arrangement, including how what you know about potential partner and the terms of that partnership.
When Family Members Help (e.g. Parents and Grandparents)
While most many families are unable to help their adult children as they are paying down their own mortgages and contributing to RRSPs, some parents have managed to save enough to help their children access their first owned home. A sizeable portion of a down payment may come as a as a wedding or graduation gift or in response to seeing a child being otherwise unable to break into the housing market.
Another way in which parents often help is by lending money to their children, whether for the down payment or for monthly mortgage payments. Grandparents too may be looking to help, seeing an investment in their grandchild’s real estate as a safe way to shelter money over and above their pension plans and potentially save probate fees by providing some inheritance in advance.
Common Law and Married Spouses
Just like how parents and grandparents can help their loved ones to buy a home, a common law relationship, marriage or second marriage can bring economic benefits to each of the parties. Together the parties may be able to purchase a home they might not otherwise independently afford.
Creative Solutions With Old and New Acquaintances
Individuals are often just as keen to own a home as many couples are. Singles sometimes “partner” with friends to make home ownership possible. The living arrangement is not much different daily than renting out space in your home, but the difference can be quite beneficial for anyone who is part owner.
While many co-purchases involve the parties living together in the home, this isn’t always the case. In one example mentioned on CBC News, two friends bought a $340,000 two-storey house together. Each “partner” paid half of the down payment and agreed to split all expenses and any capital gains when the property sold. Only one friend lives in the home while the other friend considers the transaction an investment.
Couples with Children
While families with children can find it especially difficult to find the best home in the area they prefer, sometimes they get creative and purchase a home with friends or even another couple they have never met.
In one example, in North Vancouver, a family joined up with another couple who also had a young child to buy a well-situated home. Together they bought a spacious 2,700-square-foot, two-level home, located across from a wooded park and three minutes from the ocean beach.
As many seniors are aware, shared ownership provides more than financial advantages; it can provide safety and companionship. During later life stages, owning with others as part of a group can work out quite well and may have some similarities to moving into a retirement living community.
When a group of active senior women heard about co-ownership, they sold their houses and bought quarter shares in a house they now own together. The women are building equity and expect they’ll be able to live well for under $1,500 a month, including the cost of utilities, food, maintenance, contingency fund and house cleaning services. By contrast, a retirement home would have cost each of them about $2,500 to $6,000 a month – a cost which would rise with inflation.
Protecting Yourself While Gifting or Starting a New Partnership
If you wanting to help a family member buy a first home, but you are unsure about your options, speak to a licensed professional for guidance. You should know, for example, that if you gift the money and the couple later divorces, the family home is considered part of family property and must be divided. If you loan the money for the home, however, then the loan is still considered your capital asset and it is not subject to equalization of property.
There are many opinions about how to lend money to friends and family and the risk of co-signing a loan vs lending money. It may be advantageous to loan money, but keep in mind that any interest you receive is taxable. If the interest received entails less risk than an alternate investment and it is in accordance with the CRA prescribed interest rates, then it is possible for both parties to benefit. A legally drafted promissory note with the principal amount and interest rate specified is important to obtain.
In the case of the senior women who purchased a home together, they had a detailed legal agreement made to protect the interests of the co-owners of the property. The agreement prescribes what happens if someone wants to sell, if one of them dies, or becomes incapacitated.
In any situation, a legal agreement for the home partnership is valuable and can help to avoid the risk of potential litigation. The agreement should outline the percentage of the home each person will own, a plan for how space will be used, who’s responsible for repairs and maintenance and provides an exit strategy.
If anyone asks you to cosign a loan, recognize that this is a legal agreement with no benefit to you personally and entails only risks. By co-signing a loan, you are responsible for the entire loan and not just half, which could negatively impact your credit rating if neither of you are able to make the loan payments.
Speak to a Licensed Insolvency Trustee at Harris & Partners Inc. for Help
To avoid surmounting debt in Toronto, ensure that you fully understand the terms of any new partnership for homeownership before you make a commitment. Home partnerships can provide many benefits, but if you are unsure about the arrangement or you are experiencing resulting financial difficulties, speak to a Licensed Insolvency Trustee in Ontario (formerly a Trustee in Bankruptcy). We provide debt help in Southern Ontario and can discuss options with you, such as debt consolidation.