Advisor to Client: Parents co-signing for their child’s mortgage is ‘fraught’ with risks, brokers warn

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 a mortgage, but experts warn it means taking on financial risks they may not fully understand — risks that could affect 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.

At several major lenders in Canada, he noted, 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 recalled one incident in which a mother had a “spectacular falling out” with her son after co-signing his mortgage, totalling more than $1 million, 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 approached the bank to get out of the mortgage and told the lender she would not sign a renewal, she was informed her son could renew the mortgage on his own, Butler said.

While co-signing is less common 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, said parents should consider the potential impact co-signing could have if they have multiple children who may need help buying a home, which could lead to “family squabbles.”

Co-signing for one child may affect a parent’s ability to help others 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 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 provide a lump sum of cash.

Regardless of the option, she said more parents are choosing gifts over co-signing because it means they “don’t have to be liable for anything.”