Thinking of helping your adult child buy their first home? Make sure you understand the pros and cons of each option, and how your tax situation and financial plan could be affected.
3 common options
1. Loan your child the money
Decide how much interest you want to charge. For example, you could charge the same or a higher rate of interest than what the money would earn in a bank account. Or you could set the rate lower than your child would pay on a mortgage from a financial institution. You must declare any interest you earn on your tax return.
Your child will also pay a surcharge if Canada Mortgage and Housing Corporation (CMHC) insurance is required. This is because part or all of the down payment was borrowed.
2. Co-sign your child’s mortgage
Add your name to your child’s mortgage. It seems like an easy way to help. But there are a number of risks:
It tells the bank that your child’s income or credit rating is not good enough to qualify on their own.
If you already have a mortgage on your own home, you and your child would not qualify for a high-ratio mortgage. Together, you would have to pay 20% down. On their own, your child could pay as little as 5% down.
You are liable for the mortgage payments if your child defaults.
Your name is on the title of the property. If something goes wrong, you legally have to share the responsibility. Check with a lawyer about the implications.
3. Pay some or all of the costs as a gift
You can choose to give your child enough money for a down payment, pay their monthly mortgage costs or even buy a home outright for them. There is no tax on cash gifts in Canada, but there are tax implications:
If it’s a gift you plan to leave your children in your will anyway, you will save them from paying probate fees after your death.
If you buy a home as a gift for your child, it’s as though you sold the property to them at fair market value. So you will have to pay tax on any capital gain if, when you give the house to your child, it is worth more than you paid for it.
If your child is getting married, think carefully about gifting money to them. If the marriage ends, your child and their spouse would split any equity in the home. It doesn’t matter that you gave it as a gift to your child.
Content in this section is provided in partnership with Investor Education Fund, a non-profit organization founded and supported by the Ontario Securities Commission that provides unbiased and independent financial tools to help Canadians make better money decisions. To find out more, go to: GetSmarterAboutMoney.ca
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