Before becoming ‘the bank of mom and dad’, consider this.
Helping your children buy a home? It pays to know your options.
75% of aspiring Canadian homeowners unfortunately can’t afford to buy one.
For those who were able to make the leap into the world of homeownership, 33% needed financial help from none other than—you guessed it, mom and dad.
Today’s higher home prices and stricter mortgage regulations could be making ‘the bank of mom and dad’ more essential than ever.
That’s particularly true if your child is a first time homebuyer.
In the past year alone, Canadian home prices have gone up by 25% and so have mortgage qualifying rates (from 4.79% to 5.25%). Not the best news if your child falls into the millennial or Gen Z age bracket. Which explains why almost half of these two demographics have reported receiving money from their parents in order to purchase their first home.
If you’re thinking about doing the same for your child, you should first take a few things into consideration.
The most important of which being whether you’re going to need that money for yourself.
After all, the last thing you want to do is jeopardize your retirement down the road. Especially since you’ll have your own financial obligations to cover within your set monthly pension income. Which, don’t forget, will be less than what you were earning during your working years. However, there’s a lot more to think about when it comes to gifting money to your children than simply determining whether or not you can afford to.
This is where speaking with a financial specialist can help you to see the bigger picture.
“If you decide you can afford to help, it’s important to establish a businesslike approach to define obligations and minimize misunderstandings”, says Educators Mortgage Agent Level 1 – Regional Director, Lending Services Chris Knoch.
He goes on to explain further, “This usually means disclosing the assistance to all immediate family, treating all siblings equally, using contracts, and documenting (monetary) gifts. While it may sound quite formal, it’ll ultimately provide you with peace of mind knowing that you covered all of your bases.”
Another way to cover your bases is by being aware of the pros and cons when it comes to helping your children financially:
1. Gifting cash towards their home 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 only 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. Co-signing your child’s mortgage.
The pros: With home prices at all time highs and stricter borrowing regulations (I.e. ‘stress test’), you get to play an important part in helping your child secure their first mortgage. Plus chances are they haven’t had enough time to sufficiently build up their credit history. You’d be giving them the vital boost they need to qualify for debt-to-income ratios and improve their overall credit rating.
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 all responsibility if your child ends up in a position where they 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 adult children to help out their 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 should ever want to sell or mortgage the house, you would need the consent of your child. Then there’s something else that nobody ever plans for, but could throw a wrench into this scenario—a marriage breakup (either yours or your child’s). This could make co-ownership rather complicated, since chances are the property would have to be sold in order to equally divide up the assets.
4. Buying the home and giving it to your child.
The pros: If you were actually in a position to buy a home for your child, you’d be able to immediately see (and enjoy) the results of your generous gift. Keep in mind, however, that there are several factors you’ll need to consider if you’re thinking about taking this route—so be sure to consult with a mortgage professional.
The cons: Buying a home and giving it to someone is, from a legal standpoint, the same as selling the property at fair market value. This means you would 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 what you paid for it.
When it comes to being ‘the bank of mom and dad’, you’re not expected to know everything.
If you have any questions, concerns, or would simply like to share your own experiences, we’d love to hear from you. We’ve been helping education members and their families with all of their borrowing, investing, and financial planning needs since 1975. This gives us a unique perspective into both the challenges and opportunities when it comes to helping you and your loved ones land the home they want.
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