In May of this year, I had clients looking to buy a property for their adult children. They wanted to buy a house where the children would have title registered in their names but the parents would guarantee the mortgage. That way, the children could claim the home as their principal residence and there would be no capital gains to pay when it was sold.
The financial advisor they were using said the parents had to qualify for the financing since they were the ones paying the mortgage. Then their lawyer said the title either had to be in the parents’ names or the parents had to be on title as 1% owners to their children’s’ 99 % interest or the banks wouldn’t advance the funds. As it turned out, my clients decided it was simpler to buy the property directly, put it in their own names, treat it as an investment, and pay the capital gains taxes in due course.
Well, according to a presentation we had at our office meeting this morning by mortgage broker, York Polk, that option, of being co-borrowers or guarantors on a property in the name of our self-employed kids, in practical terms, no longer exists, unless we want to live with them.
This is thanks to some crazy rules in effect with CMHC on what’s described as high-ratio mortgages for self-employed workers or salespeople. (These are mortgages where the buyers have less than 20% of the purchase price in cash, and therefore have to be insured by CMHC.) According to Genworth, which provides CMHC’s insurance,
“All applicants used to qualify [for a mortgage] must occupy the property. Spousal guarantors are acceptable provided they occupy the subject property. Non-occupant co-borrowers or guarantors not permitted.” (emphasis added)
What does this mean? It applies to all guarantors, but it means that if parents want to co-mortgage a property with their kids or otherwise guarantee their financing, they will have to live in the property too. Which completely defeats the purpose.
Here’s a few reasons why I consider this new requirement to be really, really dumb with respect to all guarantors, but particularly parents:
1) The whole point of a guarantee is that it allows the mortgage-holder to go after the guarantor for any unpaid monies that fall due and owing. Requiring the guarantor to live in the property adds absolutely nothing to that security. There is no rational reason that I can think of to require it. Nothing. De nada.
It assumes that if parents are living in the property, the kids will take better care of it, which is both patronizing and wrong. If parents are guarantors, the incentive to keep the property maintained is exactly the same. You don’t have to live with your parents (or any other guarantor) to be responsible.
2) Once you live in a property, as Pamela Wallin discovered, it can be considered your principal residence. Presumably, since you’re helping your kids buy a property, you already have a principal residence. Occupying the property you’ve guaranteed could have serious tax consequences: you could lose your tax exemption on your principal residence.
3) If your daughter wants to live in the property you’ve guaranteed with her spouse, there are rules that apply to that residence as a matrimonial property. Each spouse has the right to occupy it as a matrimonial home. What are your rights if they split up and she moves out? CMHC is requiring that guarantors occupy properties to which other people may already have legally recognized occupancy rights under other legislation.
4) How can CMHC police whether you ever actually live in the property? What happens if you move out? What if you never move in? Can the kids kick you out? What happens to the mortgage/guarantee then? Do you have a legal right of occupation? If so, based on what?
5) Finally, I’m guessing that if you want to help your kids buy a property, it’s because they’re ready to move out. But if helping them out means you have to live in the new property with them, what would be the point? In that situation, you’re better off just buying them a place yourself. But that doesn’t really teach them anything about home ownership; they’d be little more than tenants.
The purpose of these new rules is, I guess, to slow down the housing market and deter first time buyers, but what it does is create a series of absurd outcomes. If you’re a young self-employed adult, you can rent a property with a guarantor who doesn’t have to live with you, but even if you can afford to buy a property and have the requisite downpayment (let’s say 15%), you can’t have a guarantee from your parents without CMHC requiring that they move in with you.
(*Headshake*). (Actually, make that *my head hurts.*)
You’d think that CMHC would want to encourage guarantees on high-risk mortgages, rather than deter them: surely it’s in their interest to have security beyond the mortgage itself. But I guarantee this will have the opposite effect.
This whole thing strikes me as a nanny state solution. It’s going to create a whole slew of problems trying to fix a problem that never existed in the first place. It has the effect of turning parents into babysitters when their children are trying to establish their independence by leaving the nest.
Update: York Polk confirms that this requirement of guarantor-occupancy applies to all “high risk” mortgages, i.e. all those mortgages where the buyers have less than 20% of the purchase price available in cash. He says it is a requirement under the National Housing Act. And mortgage broker Jeff Gallant tweeted me to say it only applies to the self-employed, not those on salaries. (Genworth’s description adds “salesperson” to those who would have to have live-in guarantors, so if you’re on commission, the occupancy rule applies.)