As the cost of home ownership continues to rise in Canada, many adult children are turning to their parents for financial assistance to purchase their first home. While your children may have the income to cover the cost of mortgage payments and home upkeep, one of the biggest obstacles to home ownership is finding the money to come up with a large downpayment. That’s where some parents step in.
The Bank of Mom and Dad: open for business?
More and more parents are giving their kids financial gifts so they can afford to buy in Canada’s expensive housing market.
Last year, more than a third of first-time buyers in Canada (35%) received financial help in a lump sum payment toward their purchase.[1] In Ontario, a study found that approximately 4 in 10 parents of younger homeowner adults (age 18-38) helped their children financially with their purchase. The average gift? More than $70,000. Of those who helped their children, 44% used their own savings to support their child, while 15% borrowed from retirement savings or investments.[2]
Put yourself first
Supporting your child’s homeowner dream is a generous gift, but don’t put your financial health at risk; helping your children out shouldn’t come at the expense of your retirement plan. Before considering how you can help your children, talk to your financial advisor to make sure you have enough money to support yourself throughout your retirement years.
Consider different scenarios and future needs like income and potential health care costs. And, consider the effects of inflation, the rising costs of in-home heath and social support and retirement homes, or any updates or adaptations you might have to make to your house down the line.
5 ways to lend a hand
Have conversations early on with your adult children to discuss various ways they can get into the housing market. And if you’re in the position to help your children financially, you have several options to consider.
1. Loan money
Offering money for a down payment can be a great option if you have the means, and if you’re comfortable with your child repaying the loan over time. But be sure to work with a lawyer to formalize the agreement and make it legally binding; this will help avoid misunderstandings or strained relationships down the road.
Important to know: Consider the potential impact on your own financial security. Ask yourself this question: are you willing to accept the possibility that you won’t recoup the full amount?
2. Gift money
Providing a gift for your child’s downpayment is a generous gesture that can significantly ease the financial burden on your child. Not only that, but gifting in life provides an emotional reward – you get to see how the money is making a difference in your child’s life. Unlike a loan, a gift doesn’t need to be repaid, and it allows your child to start their home ownership journey without the added stress of debt.
But do know that you lose control of the funds as soon as you gift them to your child. In other words, if your child decides to use the money for something other than what you intended, it’s their choice – and you need to be ok with that.
Important to know: If funds are given outright, and the child marries and subsequently divorces, that gift is part of the matrimonial home and subject to division, meaning 50% of the gift could go to the ex-spouse.
Homebuying plans and programs
3. Co-sign a mortgage
If your adult child doesn’t have a strong credit history or income, consider co-signing the mortgage to help them secure a loan with better terms. You won’t have to access your own capital or liquidate any of your investments, your child can leverage your higher credit rating, and they’ll have the opportunity to access a lower interest rate and higher loan amount.
You might also want to consider buying a life insurance policy with your child as the beneficiary. In the event of your child’s passing, your debt obligation is eliminated – and, if your child has a dependent family, the insurance could pay off the mortgage.
Important to know: To avoid misunderstanding or issues down the road, be sure to have a lawyer prepare a legal agreement that outlines scenarios like what happens if your child misses a payment, or if you plan to exit the mortgage. Also note, if you co-sign a mortgage and are included on title, the Canada Revenue Agency may consider this arrangement to be a bare trust; therefore it may fall under the new trust reporting requirements. Talk to a Richardson Wealth Advisor to learn more.
4. Buy a house for your adult child to rent (with the option to buy later)
You may not have thought about using real estate to build out your investment portfolio, but buying a house and renting it to your child may be a way to do just that. You can purchase a home, rent it out to your adult child at a fair market rate, and then consider saving the rent money for the child to use to eventually buy the home. Another option is to invest in real estate directly with your adult child. This could involve buying a property jointly and either renting it out for income or living in it together.
Important to know: Consult with a lawyer to draft a formal agreement that outlines the arrangement you and your child agree on.
5. Set up a discretionary trust
While it’s a more complicated process, parents can purchase a property, transfer it to a discretionary trust and allow an adult child to live in the home. A discretionary trust allows the trustee (parent), to retain complete control over the property, and decide when they want to transfer the property to the beneficiary (adult child).
Important to know: Setting up a discretionary trust may create additional tax and legal complexities, so be sure to seek out tax and legal advice.
Questions to consider
If you have more than one child, are you extending financial assistance to your other children as well? How will you balance wishes of one child versus other children?
How will you manage your child’s house expectations versus what you can afford to help with?
Have you considered the impact of the current housing market and interest rates?
Have you carefully considered all the financial and legal risks associated with extending assistance to your child?
We can help
Need help understanding how buying a home will fit into your budget and impact your financial plan?
Talk to a Richardson Wealth Advisor.
We have advisory teams across the country ready to help you build your future. Search for a wealth management professional near you today.
Get in touch with us.
We’re here to help. Send us a short message explaining what you’re looking for, and we’ll reach out to you soon.
[1] Down payment dilemma: Canadian first-time homebuyers’ fear of falling short is escalating (newswire.ca)
[2] 4 In 10 Parents of Young Ontario Homeowners Financially Helped Their Child Achieve the Dream of Home Ownership (orea.com)
[3] Quebec residents can also claim a non-refundable tax credit of up to $1,400.
[4] Up to $1,253 for Quebec residents.
