In an increasingly unaffordable housing market, it's natural for parents to want to help their kids buy a home.
Talk to a real estate agent or mortgage broker and you're bound to hear stories about parental financial help. "The bottom line is that when a first-time home buyer buys a house, the parents more often than not are contributing something to the down payment," said David Larock, a mortgage agent with Integrated Mortgage Planners.
Parents, there are three good reasons to think twice about helping your kids buy a home. But I suspect you'll do it anyway, which is why there are also guidelines here for giving the gift of down payment money or co-signing a loan.
First, the reasons to rethink the idea of offering financial help:
1. You can't help with the biggest affordability problem.
It's not the down payment, which admittedly can be a very large amount of money in hot markets such as Vancouver, Calgary or Toronto. Rather, it's the income needed to carry a mortgage, home upkeep, and the cost of raising kids and meet savings obligations. Incomes aren't growing enough to keep up with rising house prices – that's why your kids can't afford a house.
2. You may yet need the money yourself.
Longer lifespans mean you need substantial retirement savings, in part because of the potential for health problems that require long-term care. Why not leave any leftover money to your kids as an inheritance after you die?
3. Your thinking on the financial benefits of home ownership may be wrong.
Owning a home as a place to live and raise a family is one thing. But if you want to help your kids buy a home because it's an investment, you're making a backward-looking assessment that may not have any relevance to what's ahead. Houses can't keep rising in price at current rates and be accessible to anyone but upper income earners (read my analysis on what happens if house prices keep rising). The era of houses as a no-brainer investment won't last.
Still want to help your kids buy a home? Mr. Larock suggests parents come through with down payment money only after their kids have decided what they can afford and have chosen a home. "Parents who wait until their kids have found a house are doing it right because they're making sure that their contribution doesn't in any way inflate the child's budget," he said.
Lenders don't much care whether clients come up with a home down payment themselves or with parental help, Mr. Larock said.
Idea: Help kids top up a down payment to 20 per cent or more so they don't have to pay the additional costs of mortgage default insurance. This insurance would add $10,190 in costs when buying the average-priced home in Canada with a 5-per-cent down payment, and $7,021 with 10 per cent down.
If their kids can't qualify for a mortgage on their own, parents can help by co-signing the loan. Be sensible about this kind of assistance – if a bank doesn't want to give your kid a mortgage, that's a sign that he or she isn't ready to buy a home. Remember, co-signing parents are on the hook if the child defaults on the mortgage.
Mr. Larock said that in Ontario, parents should be aware that co-signing a mortgage can complicate the process of claiming the province's land transfer tax refund for first-time buyers. According to the Ontario Ministry of Finance website, the rebate would be available if the parent does not have an ownership interest in the home and is just helping to satisfy lenders. Mr. Larock said the same rules apply to Toronto's land transfer tax refund. (Combined, the two refunds max out at $5,725.)
The simplest way to help your kids buy a home is the cash gift. Cleo Hamel, senior tax analyst at H&R Block, said there are no tax implications for either parents or kids in this situation. Parental loans to a child are a different story, though. "When repayment begins, the interest is income to the parent that lent the money," she said.
One final thought for parents who want to help their kids afford a house: Stop all financial assistance at once and let market forces take over. Losing those subsidies from mom and dad might be the jolt the real estate market needs to take a pause and let incomes catch up to prices.
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Rob Carrick