Co-Signers and Gifted Funds: Helping the Next Generation

With housing prices in the GTA and surroundings remaining high, many young buyers are turning to family for assistance in the form of co-signing or gifted down payments. A co-signer is someone who is added to the mortgage and the title of the property, effectively becoming legally responsible for the debt if the primary borrower fails to pay. This is often necessary when a buyer has a great career path but hasn't yet built the income history or credit score required by the bank's stress test. For the co-signer, this means the mortgage appears as a liability on their own credit report, which can impact their own borrowing power.

Gifted down payments are a more straightforward way families help each other. A gift must come from an immediate family member—usually a parent or grandparent—and it must be a 'true gift,' meaning there is no legal requirement for it to be paid back. Lenders require a signed 'gift letter' from the donor, along with proof that the funds have been transferred into the borrower's account. This prevents the down payment from being another hidden loan that would skew the buyer's debt ratios. In Ontario, gifts are a major driver of the entry-level market, allowing many to bypass years of saving while prices continue to rise.

The legal implications for co-signers are significant. Being on title means you have an ownership stake, but it also exposes you to potential capital gains tax issues if you already own a primary residence. Furthermore, if you are a co-signer and the primary borrower misses a payment, your credit score will be negatively impacted just as much as theirs. It is a relationship of extreme trust. I often recommend that families have a side agreement drafted by a lawyer to outline what happens if one party wants to sell or if the primary borrower's financial situation changes. This 'family contract' helps prevent future disputes.

I suggest that co-signers look at their own long-term financial plans, such as an upcoming retirement or a planned move, before committing to a 5-year mortgage term for someone else. We should aim for a strategy where the co-signer can be 'released' from the mortgage after a few years once the primary borrower's income has increased sufficiently. If you are gifting money, ensure it is in the recipient's account at least 15 days before the closing date to satisfy anti-money laundering requirements. Let's sit down as a group to discuss the responsibilities and the most efficient way to structure the ownership and financing.