The Learning Centre:
Before becoming ‘the bank of mom and dad’, consider this.
Helping your children buy a home? It pays to know your options.
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Parents have been helping their children buy their first home for a long time. However, today’s high prices and strict mortgage regulations may be making ‘the bank of mom and dad’ more essential than ever. A 2017 Canadian study* found that 44 percent of Canadian millennials expected help from their parents when buying their first home. If you’re one of these parents, there are several things you need to consider before pitching in.
There are two important ground rules to consider.
When your children ask for financial assistance to buy a home, chances are you’re going to consider it. For one thing, it’s natural to want to help your children. For another, many baby boomers consider home ownership to be a sign of success. But before deciding, take a long, hard look at whether you’re going to need the money yourself. The last thing you want to do is jeopardize your retirement (and need your children’s financial support) down the road. Meet with a financial specialist to determine whether helping your child financially could impact your personal financial goals.
If you do decide to help, it’s important to “establish a businesslike approach to define obligations and minimize misunderstandings”, says Educators Agent–Regional Director Chris Knoch. “This usually means disclosing the assistance to all immediate family, treating all siblings equally, using contracts, and documenting gifts.”
Know the different ways to help, and their pros and cons.
1. Gifting cash towards the purchase
The pros: This option can make the most sense from a tax point of view. If you would be leaving the funds to your child in your will anyway, gifting it will save them having to pay probate fees after your death. Also, because Canada has no gift tax, your child would not pay tax on the gift.
The cons: If your child is married and the marriage ends, the equity in the home would be split with their spouse … regardless of whether it was a gift to your child.
Also, to avoid misunderstanding or discord between siblings when you pass away, it should be crystal clear whether the gift was intended to be part of your child’s inheritance.
Remember: As a condition of the loan, at least 15 days before the funding date the lender will need: a letter stating that the money is a gift and will not need to be repaid, and proof that the funds are deposited in your child’s account.
2. Lending the money
The pros: “If you charge a lower rate than they’d get from a financial institution, your child will find it easier to manage the budgeting involved in owning and maintaining a home”, says Chris.
The cons: “You would have to declare any interest earned on the loan on your tax return. Also, because part of the down payment was borrowed, your child would pay a surcharge if Canada Mortgage and Housing Corporation (CMHC) insurance were required.”
3. Co-signing your child’s mortgage
The pros: If your credit rating is better than your child’s, you may be more likely to be approved for the mortgage, or get a better rate.
The cons: This approach tells the bank that your child’s income or credit rating is not good enough for them to qualify on their own. Plus, you assume responsibility if your child can’t pay their mortgage.
The pros: Co-ownership will allow both you and your child to share in equity gains should the property increase in value. If all owners are living on the property, it can be a convenient way for children to keep an eye on and help out aging parents. Also, as you need less space and your child needs more, they can arrange to slowly assume full ownership over time.
The cons: If you want to sell or mortgage the house, you need the consent of your child. Also, the house could get caught in bankruptcy proceedings or a marriage breakup.
5. Buying the home and giving it to your child
The pros: If you are in a position to buy a home for your child, you’d be able to see and enjoy the results of your generosity immediately.
The cons: Buying a home and giving it to someone is as if you sold the property at fair market value. You will have to pay tax on any capital gain if, at the time of giving the house over to your child, it is worth more than you paid for it. Some people may also view this option as depriving your child of the opportunity to learn a valuable financial lesson.
The lending specialists at Educators Financial Group are trained and experienced professionals.
As mortgage brokers, they’ll search for the right mortgage for you from a variety of lenders. They’re here to answer any questions about getting a mortgage and buying a home.
Get in touch today, online or by phone at 1.800.263.9541.
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The information provided is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering of tax, legal, accounting or professional advice. Please ensure to consult your accountant and/or legal advisor for specific advice related to your circumstances. Educators Financial Group will not be held responsible or liable for any losses, costs, damages or expenses incurred by reason of reliance as a result of the aforementioned information. The information presented was obtained from sources that are believed to be reliable. However, Educators Financial Group cannot guarantee their completeness or accuracy.