Last week, a national advisor website reached out to me after I weighed in on one of their polls. The question was simple on the surface:
Should parents co-sign a mortgage for their adult children?
Most of the responses circled around affordability. After all, if the parents can afford it, why not help their kids get into the market?
But in my comment, I suggested there’s much more to consider than simply whether the parents have the financial capacity. That reply caught the website’s attention, and they asked me to elaborate.
After our call, it really got me thinking about the question and reflecting back on what I’ve seen over the years.
Housing prices in Canada have stretched beyond what many young professionals can qualify for on their own, and parents often step in with the best of intentions. Maybe they plan on being able to help with the down payment to make their mortgage lower, or possibly to help with the mortgage payment itself.
The two most common reasons I hear from my clients are:
“I want them to get into the housing market early, and not waste their money on rent.”
“I think it’s a really good investment, it should grow a lot in value.”
But as with most financial decisions, the real picture is more nuanced.
When The Bank Says No
Many years ago (more than I care to reveal, at least), I was a lending officer at a major bank, and I often heard the frustration of someone who didn’t qualify for a mortgage. Trust me, I understood why they were upset. Especially when they paid the same in rent as their potential mortgage payments would be!
But being told NO for a mortgage is a warning sign worth paying attention to.
Lending standards are by no means perfect, but they do serve a purpose: protecting borrowers from being over-extended. And there’s more to this than parents needing to help with mortgage payments.
When a young couple’s mortgage payment takes up the bulk of their disposable income, they often find they have little left over for building up their savings, whether for an emergency or retirement. In some cases I’ve seen, they can end up resenting their home because they feel they’re just working to pay the mortgage.
Ideally, it’s not just the parents who should have a solid financial plan, but their children as well. One that shows the balances and trade-offs between allocating their disposable income toward debt and savings (and ensuring they have some money for fun stuff! Being house-poor is a situation no one wants).
Significant Risks Are Involved in Co-signing
1)If your child is in a relationship and their partner/spouse moves into the house, things can become murky if they split up/divorce.
Contributions from you, whether for the down payment or ongoing support, might be viewed legally as a gift upon separation. That gift could then be subject to division, putting some of your hard-earned capital into the hands of someone outside your family.
2) Speaking of your family, there’s the question of fairness.
If you help one child by co-signing, consider how you may want to help (or may be asked) by your other children to help in the same or other ways.
3) Protecting against the unexpected
There’s also the reality that life doesn’t always go according to plan. What happens if your adult child suffers a serious illness, or becomes disabled?
Would you be able to cover their mortgage payments for an extended period of time or indefinitely?
But being told NO for a mortgage is a warning sign worth paying attention to.
Life insurance, critical illness insurance, and disability protection aren’t just “nice-to-haves” for young homeowners, they’re essential safeguards. They ensure if the unexpected happens, they’re not forced to sell their home or have the financial burden transferred back to the parents who co-signed.
And these plans have monthly fees which need to be part of their budget.
Co-Signing For An Adult Child Goes Far Beyond Affordability
Should parents co-sign their child’s mortgage?
My answer is: maybe, but only after weighing all the consequences.
It’s about much more than simply being able to afford it.
The heart of financial planning isn’t just about numbers, it’s about asking the deeper questions.
What does this decision mean for your future retirement income?
For your other children? For your taxes? For your peace of mind?
Sometimes the kindest help we can offer isn’t a signature on a mortgage, but guidance and perspective on the bigger financial picture.
Enjoyed this article? I’d love to hear from you! I’m always interested in hearing about the unique financial situations doctors have. Send me a note! And make sure to check out my Amazon bestseller, The Doctor’s Handbook: 5 principles of wealth you weren’t taught in med school.
