I often have young clients buying their first home together. Many are fortunate to have parents who help them financially with the down payment.
I’ve also had clients who’s parents buy them the entire house or condo.
What happens if your parents buy you a house [or give you a considerable amount of cash for a down payment] and in the future your marriage ends in a divorce?
Although the cash (or home) you received was a gift from a parent, according to the Family Law Act in Ontario, if it was a matrimonial home then the son/daughter-in-law is entitled to receive half of the equity upon divorce.
In other words the ex son/daughter in-law would receive half of the money the other spouse’s parents contributed.
There is a way for parents to protect their financial interests while still keeping everything fair for both recipients of the generous gift.
Upon the sale of the home, the mortgage must be paid in full out of the proceeds from the sale. Then, the remaining equity belongs to the home owners.
If one parent is going to give a gift they can simply register a mortgage against the property in the amount of the gift.
The mortgage can be an open mortgage, at o% interest, with no demand for payments by the parent if they prefer.
Let me share a true story to illustrate.
A few years ago I had clients who bought a $2,000,000.00 house. One spouse’s parents bought them the house.
The parents wanted their son and his new wife to live happily ever after together.
But if the new couple were to get a divorce in the future, $1,000,000.00 of the equity of that house would go to the ex daughter-in-law.
So, the groom’s father registered an open mortgage in the amount of $2,000,000.00 against the house at o% interest, with no demand for payments or repayment.
That way, if the house was ever sold because the couple got a divorce, then the generous father would get back his full $2,000,000.00.
You might be thinking “that’s unfair to the daughter-in-law”. She was cheated out of her share.
Not really. In a marriage the couple is equally entitled to 50% of the equity + capital appreciation (or depreciation if the case may be), from the time they buy the property to the time they sell it.
So, while there really is no reason a daughter or son-in-law should walk away with half of a gift from the other spouse’s parents, if you consider the scenario I provided, you’ll see the daughter-in-law in this scenario would still be entitled to her fair share.
Here’s what I mean. The “Lender” provided $2,000,000.00 as a mortgage to buy the house. And whether the Lender is Daddy & Mommy or a major bank, the lender always get’s their money back.
Then, if the couple lived in the house for 6 years and the house was then worth $2,800,000.00 the divorcing couple would each be entitled to 50% of the $800,000.00 capital appreciation of that home.
So the daughter-in-law would still get her 50% of what she’s entitled to. The lender just gets his/her money back first.
If you’re thinking of buying a home and you want to talk about how your parents might be able to help. Or if you’re a parent and want to know how to help your kids buy a home safely while protecting everyone’s interests, I’m always happy to chat and answer your questions.