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fall mortgages

Townhouses in Toronto. Soaring house prices in Vancouver and Toronto have made it increasingly difficult for first-time buyers to break into the market. Parents are jumping in to help their adult children lock down a home.Ian Willms/The Globe and Mail

For the past few years, Maria Henheffer and her millennial son, Thomas, talked regularly about the impossibility of buying a home in Toronto.

Ms. Henheffer, a New Brunswick lawyer, remembered the joy of buying her first East Coast home in the '80s; her son faced a much tougher market.

Then she and her husband came upon a solution: They could lend their son money for a stake in the home. They bought about a 40-per-cent stake in a west-end Toronto home, with a signed agreement for it to be paid back with a pro-rata share of the profit, whenever their son and his partner sell.

"Hopefully I'll live until I'm in my 80s, so I'm not going to need that money for a little while," Ms. Henheffer says. "So why not let the kids use it, and I invest in the Toronto market?"

Soaring house prices in Vancouver and Toronto have made it increasingly difficult for first-time buyers to break into the market, and kind-hearted parents are jumping in with more frequency to help their adult children lock down a home.

A Bank of Montreal study earlier this year found that 44 per cent of millennials expect a loan or gift from relatives when jumping into a first home.

Gifts and loans of that magnitude obviously come with risk, though. It's wise for parents to weigh the impact on their own financial health, plus make sure everything is documented in case of divorce, default or other dangers to their money.

"If we're sitting with a parent or grandparent who wants to contribute, the first and foremost thing is to start looking at your wealth plan, to look at the big picture," says Cynthia Caskey, a vice-president and private wealth-management adviser with TD Wealth. What's most important, she says, is that parents tuck aside money for emergencies or health issues before doling out wealth.

Adult children would undoubtedly be thrilled with a gift, but not all parents have nest eggs big enough. Still, lending money to help a child buy a home can look tempting. With low interest rates and volatility in equities, it's a different kind of play on real estate: The child can break into the hot market, and the parents can collect interest on the loan or, like Ms. Henheffer, agree to a pro-rata stake.

But it's an easy way to tangle up your money. "It takes time to buy or sell, plus lots of transactional costs, especially if it's not your family home," Ms. Caskey says.

One crucial thing, for both gifts and loans, is to make sure everything is documented clearly. "We want to make it clear exactly what the money represents," says Cheryl Goldhart, a family lawyer and president of Goldhart & Associates in Toronto.

Natalia Denchik, a Toronto lawyer who specializes in both family and real-estate law, adds if parents give money as a gift to their adult child, "definitely make a simple agreement" in writing.

A loan, meanwhile, can come with varying levels of documentation and security. Ms. Henheffer had her son and his partner sign an informal letter, akin to a promissory note, but says that fit her comfort level. "Some people would want to do it more formally and do a second mortgage."

A mortgage not only dictates the terms of what's owed by the child to the parent, real-estate lawyer Bob Aaron says, but it's also "secured against the house, so that the house cannot be sold without paying off that debt."

At the very least, it should be backed by a promissory note dictating the terms of repayment. "We paper these things fairly closely to show what the intentions of the parties are," says Daniel Horwitz, a real-estate solicitor who regularly works with family-law firms.

Documentation is especially important if the adult child is married and is sharing the house with his or her spouse. Being prepared for a separation is an awkward subject to broach but an important one nonetheless, especially if it hasn't been covered in a prenuptial agreement.

While a financial gift from parent to child can be excluded from equalization in a divorce, putting the gift into a matrimonial home generally makes it lose the exclusion. More commonly, as Ms. Goldhart explains, "the now-separated spouse shares that equity in the house that has been obtained as money from the parent."

This is where documentation becomes even more important. "On separation, we regularly see the allegation or claim that 'the money from my parents was a loan, and it has to be paid back before we share the equity in the home,'" Ms. Goldhart says. "There's often disputes that we have in court, arbitrations and elsewhere, over: Is it a loan or a gift?"

In divorce, when calculating equalization, debt gets divided as well as assets, which can throw a wrench into repayment plans for a parental loan. Richard Bell, a Vancouver lawyer specializing in real estate, says, "There are some challenges when you put family into the mix. It's the old story: Don't go into business with family. It creates stresses and strains."

Awkwardness can easily come from the parental side, too, if repayment terms aren't clearly documented.

"If you're happily married and your father-in-law says, 'I need my money back,' and he paid for a third of the house, you might not be able to go to the bank and get that money," Ms. Goldhart says. "You may be forced to sell your house, and Sunday-night dinners may not be as pleasant as they used to be."