How can you take over a mortgage for someone else?

Dear Ross: We live with our parents now after selling our own house two years ago. They are having difficulty making their mortgage payments (it’s a HELOC with a balance owing of $372,000), and we have all agreed Loras and I will assume some ownership of the house and formally help out with the mortgage.

How can we do this to minimize land transfer taxes, especially as we live in Toronto, where these taxes are so high? We think the house is worth around $560,000. Thanks!

-Diana

Ross said: Hi Diana, you need to sit down with your parents and figure out what you want the ownership structure to look like after all is said and done. There are potential complications which can arise in the future depending on how things are structured – eg. joint with right or survivorship or tenants-in-common, and what percentage should each party hold.

What are your options for assuming ownership of the house?

1) If you and Loras wish to go on title solely, you may do so, but it will trigger huge land transfer tax. The “good news” is the tax will be calculated on the present outstanding balance of the HELOC at TD – so it would be around $7,500 rather than $14,600 or so if it was calculated on the current value of $560,000.

2) A much cheaper way is to add you and Loras onto the existing title, but for only a 1% holding each. You and Loras would be tenants in common, and your parents would remain joint with right of survivorship for the other 98%.

You and Loras would each be liable for Land Transfer Tax on only 1% of the present encumbrance ($372,000) which is a negligible amount. (Less than $100) This would still pave the way for applying for a brand new mortgage for all four of you immediately thereafter.

While this is the cheapest approach today, this structure might prove cumbersome down the road, so you would be well served by consulting an estate lawyer now.

3) Maybe a different approach is better when you take out the new mortgage -> eg 25% held equally with right of survivorship. You and Loras would pay land transfer taxes on an amount of $372,000, reflecting 50% ownership.

This will be less than $3,750 and as money is tight you could increase the size of the new mortgage to cover that expense. Still, this is a good deal less than the $14,600 you would be looking at if you took on full ownership.

Diana, I am not a lawyer, and none of the above should be construed as legal advice,  but I have seen this approach work successfully in the past. I consulted real estate lawyer Mariya Berenbaum (416-418-8044) before answering this question.

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