Proceed with caution when giving your kids a boost to home ownership
A little while ago, I posted a blog titled “Helpful tips for first-time home buyers and their parents in a rising rate environment”. In it, I discussed well-meaning parents who gifted or loaned money to their children to help them with a down payment for a home and issued some stark warnings:
- Don’t put yourself in a financially precarious position to help your kids buy a home.
- If your intent is to free up cash from the equity in your home to gift or loan to your children, talk to a qualified mortgage broker about a Home Equity Line of Credit or Reverse Mortgage.
Millennials and Gen Zs:
- Be mindful that your parents may need all their savings to remain financially independent in retirement.
Recent data released by Statistics Canada shows the number of people 65 or older with an outstanding mortgage on their principal residence is now at 1.5 million. Given that two-thirds of Canadians are homeowners and just under half own their homes outright, the number of mortgage holders over 65 years of age is cause for concern.
Today, more retirement-age people are carrying mortgages – a trend that has been fuelled by years of steadily increasing housing prices in a 14-year low interest rate environment, beginning in 2008. In 2022, soaring interest rates increased the cost of carrying those mortgages but the biggest factor in recent years is the number of first-time homebuyers relying on their parents for financial support, leaving many parents with little choice but to tap into their home equity or retirement funds to provide that support.
This sets up a potentially risky situation for parents who now must rely on their homes to increase in value while depending on CPP and OAS to fund their retirement. With no other investments, such as stocks, bonds, GICs or savings, a common strategy involves parents selling their home and either downsizing or buying in a less expensive area to create an instant retirement nest egg.
A major move is difficult at any age but particularly so in retirement as you’d have to seek out new health care specialists such as a dentist and family doctor (if available) and seek out other medical facilities (which may or may not be available close by). Not to mention moving away from family and friends, and the community with which you’ve become comfortable and familiar.
It may be difficult to take the emotion out of the equation when it comes to helping your children but it’s critical that you don’t jeopardize your own financial security in the process. Here are a few tips and things to consider when deciding how to help your child purchase a home:
- If you are going to provide money to your children for a down payment do not make an outright gift. Document a loan of the funds (consider whether this will be an interest-free loan or not) and place a lien on the property once purchased. The loan agreement protects the funds from creditors in the event your child is an owner of a small business, and the business fails. In addition, if your child marries and subsequently divorces, a gift of monies is part of the matrimonial home and subject to division, meaning 50% of the gift goes to the ex-spouse whereas a documented loan amount is not. The loan would be paid upon sale of the matrimonial home and can be re-lent to your child later to purchase a new home.
One caveat in crafting a loan agreement, courtesy of Ross Taylor of Concierge Mortgage Group, “if parents make a loan to the kids the mortgage broker is ethically bound to disclose it’s a loan and not a gift. The loan would then be added to the liabilities section of the application and a payment ascribed to the loan. The payment will impact debt service ratios”.
- Make sure you understand the implications of co-signing a mortgage or credit line on behalf of your child. Your mortgage broker will explain the pros and cons of this approach to help your child buy a home.
- Closely review your child’s budget for day-to-day living and maintenance costs on the home they have chosen to purchase. It’s not uncommon for first-time buyers to underestimate the impact homeownership will have on their lifestyle – after paying the mortgage and any house-related expenses, there may be little funds left for other necessary expenses such as a new car if needed, furnishings, or even the flexibility to make career changes if desired. The novelty of homeownership may quickly wear off if they feel “trapped” by it.
- The new Tax-Free First Home Savings Account (TFHSA), expected to be rolled out in mid-2023, will allow each spouse, as a first-time home buyer, to contribute $8,000 per year and receive a tax deduction. That means in five years the combined savings of both spouses would be in excess of $80,000 if invested properly, and this can be used for a down payment without tax implications for either spouse. See my blog post titled Let’s take a close look at the exciting, new Tax-Free First Home Savings Account coming in 2023 geared towards Millennials and Gen Zs! for more about this new program.
The TFHSA may be a good option to lessen the burden of a gift or loan from parent’s retirement funds or home equity and it can be combined with any funds from a Tax-Free Savings Account (TFSA) as well. Asking your kids to spend a few years saving up a bigger down payment before they buy helps to ensure they’ll be ready for the responsibility of home ownership when they do.
- Parents, if you are borrowing to provide a down payment consult a mortgage broker to recommend the best and least costly options.
These tips are a great starting point, but a mortgage broker is your best source of information and advice when it comes to making any mortgage decision. Get in touch with one of our mortgage brokers today to discuss the best way that you can help give your child a boost to home ownership without sacrificing your own financial security.