Wealth shifts to next generation as parents help kids with down payments

Brian Cosburn knew that his daughter and her husband would not be able to afford to buy a house in Mississauga, close to where his family has lived for years. With prices in the city topping $1-million, there was no way that they and their young family could get into the market.

“They both have nice jobs, but it was the down payment,” said Mr. Cosburn, 74, a retired maintenance operator for a Bay Street tower.

But Mr. Cosburn and his wife were in a position to help. Most of his money was in a registered retirement savings plan, and he didn’t want to touch it because of the taxes he’d pay on the withdrawal. But they had paid off their house 15 years ago and decided to tap that equity through a reverse mortgage, which has to be paid off when they sell.

They were able to give their daughter the equivalent of a 25-per-cent down payment so that she and her husband could buy a house and use the income from their jobs to make the monthly mortgage payments.

“My daughter was just starting off and has the two grandkids and that is just the way it is. You try to help your family,” he said.

More and more Canadian parents are finding themselves in this situation, seeing their children priced out of the real estate market and anxious to help. The amount of money they are giving to their children to buy a house is rising sharply, speeding the transfer of wealth from one generation to the next and contributing to soaring home prices.

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And rising prices have let them build up equity. They aren’t just dipping into their savings, but are advancing inheritances and in some cases, like that of Mr. Cosburn, they are remortgaging their own properties.

Neither Statistics Canada nor Canada Mortgage and Housing Corp. track intergenerational wealth transfers. But the Rennie Goup, a Vancouver-based real estate brokerage and research group, estimates that about 70 per cent of Canadian homeowners over the age of 65 are mortgage free and hold $1.2-trillion in equity in their homes. That is up from $805-billion in 2016, according to the group’s calculations using data from the 2016 census and the Canadian Real Estate Association.

“Parents who don’t have any mortgage or the liabilities are increasing their own liabilities to let their children purchase,” said Zahra Marani, partner with Marani Law LLP, which specializes in real estate and private lending. “It goes to show that the parent generation definitely believes in property as an asset and they want to see their children flourish,” she said.

Laura Martin, chief operating officer of mortgage brokerage Matrix Mortgage Global, estimates that 60 per cent of her millennial clients are getting some help from their parents, either with the down payment or as co-signors of a mortgage, which puts parents on the hook for the monthly payments if their child is unable to make them.

“They want their adult children to enter the market before it’s too late,” she said. “Parental assistance with living-inheritance giving is the number one driving factor pushing up the prices in Canada’s largest urban markets.”

With the typical home price in Canada more than $700,000, it’s difficult to save enough for a down payment. It’s not just Vancouver, the country’s priciest real estate market, where the home price is upward of $1-million. The typical home price in the Toronto region climbed into the $1-million territory this year. Houses in Chilliwack and Victoria in British Columbia, as well as Guelph, Kitchener-Waterloo and Hamilton in Ontario are also quickly approaching $1-million.

Since the pandemic started, the average selling price of a home has increased more than 30 per cent. Values are climbing at a faster pace in the suburbs and smaller cities, with homebuyers looking for bigger properties for home offices, living and entertainment.

As of the end of March, it took 63 months to save for the minimum down payment on a home in Canada, compared with 55 months in the first quarter of 2020, according to National Bank of Canada’s housing-affordability monitor. The bank looks at the months required to save for a down payment if the savings rate is 10 per cent of the median household income.

In the Toronto region, the number of months required to save for a down payment tripled to 277 months. Of the 10 major cities examined in the quarterly report, only Calgary remained the same. Every other city saw a deterioration in affordability. The number of months required to save for a down payment in Hamilton is 63; Vancouver is 317; Montreal 37; and Ottawa 39.

“For a lot of kids, how else are you going to get the amount necessary,” said Steven Ranson, chief executive of HomeEquity Bank, which specializes in reverse mortgages. “People can’t believe how much they made on their houses. In a sense, they have more money than they thought and recognize the challenges. ‘Why would I wait until I pass away to help them. Why don’t I help them now,’ ” he said.

The country’s major lenders have witnessed the increase in the size of down-payment gifts.

“We are seeing families gifting a higher dollar amount to the next generation to help them buy a home,” said Nicole Wells, CIBC’s vice-president of real estate secured lending. CIBC has tracked the amounts given by its clients, and says it has increased from an average of $98,700 in 2019 to $124,600 last year. In the three months ending January, the average amount was $156,000.

At BMO Private Wealth, its president for the Toronto region said down-payment help used to range from $10,000 to $30,000. Now, the gifts are typically about $45,000, and in some cases between $100,000 and $200,000.

“They need a bigger down payment,” Sandra Henderson said. “The pandemic has accelerated the size of the gift and the timing of the gift,” she said.

At Royal Bank of Canada, high-net-worth families are increasingly inquiring about ways to provide down payments or loans for down payments and ensure that it will come out of the child’s future inheritance if the loan is not repaid.

Tony Maiorino, RBC’s head of wealth management, said parents are saying “‘I want to help them do this. But want to make sure that if something happens to me, that that comes off their net inheritance.’”

The three banks said their clients are primarily using funds from their investment portfolios.

Al Marani, 37, is one of those who had to turn to his parents for help. In 2015, he bought a $434,000 preconstruction condo in downtown Toronto. He made a down payment of $86,800. His bank provided him with a preapproved mortgage for the remainder of the purchase price, which was due in 2019 when the condo had been slated to be built. However, construction delays pushed the completion until this year, putting Mr. Marani in a tough spot.

The restaurant that he runs, a Cora Breakfast and Lunch franchise in Pickering, Ont., shouldered a 40-to-50-per-cent drop in revenues when the pandemic restrictions shuttered indoor dining. Even though his business had been profitable before the pandemic, his bank told him that his preapproved mortgage was no longer valid because there was no security in the restaurant industry.

“In my naivety, I did not think it would be a problem to get a mortgage,” he said.

Mr. Marani considered alternative lenders but the interest rate was more than 7 per cent, nearly triple the rate offered by the big banks. He eventually asked his parents whether they would consider giving him a loan so he could close on the condo. They agreed and took out a reverse mortgage. “Mum and Dad were willing to help out as much as they could. In doing so, they put their house on the line,” he said.

HomeEquity Bank’s Mr. Ranson said parents taking out reverse mortgages for down-payment gifts occurred mostly in pricey Vancouver. But now it is common across the country.

For Mr. Cosburn and his wife, they wanted to ensure that their daughter and grandchildren did not experience homelessness that his wife suffered through when she was growing up. His wife’s parents lost their house when she was a teenager. “That kind of experience sticks with you,” he said.

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