It’s not uncommon for parents to want to help their adult children enter the housing market. For some, that help comes in the form of co-signing for their child’s mortgage, but experts warn that means taking on financial risks they might not understand and could impact their own debt and retirement plans.
“The most important thing to understand about co-signers is that if there are four people on the mortgage, each of them is not responsible for 25%; each one of them is responsible for 100%,” said Ron Butler, principal broker at Butler Mortgage.
Co-signing a mortgage can be a risky commitment
At several major lenders in Canada, he noted that only one person listed on the mortgage agreement needs to sign for a renewal to take effect. “There could be four people on the mortgage. The bank will accept the sign-off of one single person to process the renewal, and once the renewal is processed, it’s all locked in for another five years,” he said.
Butler said once you co-sign, it’s extremely difficult to remove yourself from the mortgage. “You should probably never co-sign, to be honest with you. Co-signing, guaranteeing mortgages, is fraught with danger,” he said.
Butler recalls one incident that saw a mother have a “spectacular falling out” with her son after co-signing his mortgage, totalling over one million dollars, years earlier. “Now she absolutely wants off the mortgage. She does not want to have any financial ties to the son,” he said. When she tried to approach the bank to get out of the mortgage and told the lender she would not sign a renewal, she was informed that her son could renew the mortgage on his own, he said.
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Early inheritance or cash gifts may be safer than co-signing
While co-signing for a child’s mortgage is not as popular with the slowdown in the housing market, Butler said, it was an “epidemic” during the real estate frenzy of the early pandemic years when interest rates hit rock bottom.
Leah Zlatkin, a licensed mortgage broker and LowestRates.ca expert, noted parents should consider the potential impact co-signing could have if they have multiple children who might need help to buy a home, leading to “family squabbles.” Co-signing for one child may affect the parent’s ability to help their other children in the same way, as there is only so much debt a person can take on.
Instead of co-signing, Butler said providing a monetary gift or early inheritance may make more financial sense for parents looking to support their children’s real estate aspirations.
“If you’re in the money and you wish to give an early inheritance, that is absolutely fine,” he said, adding that parents should know their own capacity to give.
Zlatkin said parents could opt to take out a home equity line of credit and gift that money to their kids or just provide a lump sum of cash. Regardless of the option they choose, she said more parents are opting for a gift than to co-sign because then the parents “don’t have to be liable for anything.”
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