5 August 2010
Today we see a lot of examples when parents give money for the mortgage down payment. In this case a gift letter is required. It should be signed both by the person who gives money, and by the person who receives it. The deal is that a lender needs to know the gift of money is true – and won’t be repaid after approval.
Such a gift is better than a loan, because in case of a loan CMHC (Canada Mortgage and Housing Corporation) will charge higher insurance premium.
Yes, a gift is a gift, so it’s necessary to think twice before giving it.
Myron Knodel, a tax and financial planning expert at Investors Group shows us a good example: “If a parent were to give their child $100,000 to buy a home and should that child go through divorce, the equity in that home would be divided evenly between the two parties. It doesn’t matter where the money came from. As a result, your family loses $50,000”.
If you have your family member as a guarantor or a co-signer there are only two reasons for this: either your income is not enough to qualify on your own or your credit rating has certain problems.
If the parent is a co-signer or guarantor, he or she is responsible for the mortgage payments if the child can’t make it.
If you plan to co-sign for several children, you should know about certain CMHC rules. According to them, you can’t qualify for a high ratio 5% down mortgage in case you own more than two properties; the second and third are considered investments, so 20% down might be required.