One of the most common ways that parents or grandparents seek to help their children or grandchildren financially, when they are able, is to help them buy their first home.
You may have noticed that since the pandemic housing prices in Canada are on a bit of a hot streak. That means that first-time homebuyers can often find themselves at a disadvantage. The rising cost of home prices and the recently introduced more rigorous mortgage qualifications have made entering the homeowners ranks more challenging than ever.
Because of these challenges, many parents or grandparents may chip-in with some financial assistance to help their kids or grandkids who are looking to buy their first home. Perhaps you were even thinking of doing this yourself.
You are not alone.
A recent study by the US National Association of Realtors’ 2021 Home Buyers and Sellers Generational Trends reported that 23% of homebuyers between age 22 and 30 used cash gifts from their family or friends as the source of the down payment.
Here in Canada a Leger poll conducted by FP Canada discovered that 48% of parents with children under 18 are planning to help their children to purchase their first home, which is up from 43% the same study found back in 2017.
It also found that parents could be postponing their own retirement to do so. Despite the parent’s good intentions, the financial toll of helping their children has increased over the past two years, and certainly has in 2021.
If we dig a little further back to 2019, an RBC poll found that 96% of parents with adult children between the ages of 18 and 35 said that they have financially supported their children in adulthood, and 48% who are still helping their 30- to 35-year-old children.
The RBC poll also said that while 88% of parents polled were happy to be able to assist their adult children, 36% were concerned about the impact on their own retirement plans and savings, and another 33% were worried that helping their children might force them to delay retirement plans.
Having the ability to help your kids financially is a blessing and a luxury and of course your children will appreciate it. However, there are a few factors that you should consider before you write the cheque for the down payment on your child’s home.
What to consider
The first thing you should consider is your own financial goals. You are not just giving up money that you have now. There is earning potential in your dollars in your own retirement portfolio. You should consider how giving such a large gift will impact your future ability to meet your own needs. Lifespans are increasing and that means that you will need a larger nest-egg.
There is also the consideration of what the transaction will look like. You could loan your child the money for the down payment with repayment terms that allows them to get a start in life and allows you to recoup some of the funds for your own retirement. You can also decide what, if any, interest will be owed. You could co-sign a mortgage or you could give them an outright gift of money, to name just a few ways to help your children. There are many more.
These arrangements are often made while seated at a kitchen table but you should always make sure that there is a clear agreement in place that both sides understand, including repayment terms and what the responsibilities are for each party. A simple written agreement that everyone understands can save a lot of ambiguity.
You will also want to consider what happens if there is a dissolution of your child’s marriage and how your gift or loan would look in a divorce proceeding. Not exactly holiday meal table discussions, but it is still an important consideration, nonetheless.
If you choose to become a co-signer on the mortgage, it is important to understand that you are assuming a shared legal responsibility to repay the mortgage if your child in unable to do so.
If you simply decide to give your child an outright gift, there are a few things you should be aware of. There is no “gift tax” in Canda and that means that any Canadian that receives a gift or inheritance does not have to include the amount in their income.
Here again, it is important to consider what happens to your gift in the event of a divorce. You might not want the money back, but you may also want the money to stay with your child. You can structure your gift with a provision in place in case of a break-up. For example, a contractual agreement could stipulate that if your child divorces, the money stays with your child and not with the former spouse.
There is no doubt that helping your children out financially is increasing in frequency and it is also moving up the list of important goals for parents and grandparents. I have seen it in my own practice with my own clients. It is a wonderful goal for all involved, but like anything else, it is a great idea to plan for it and make sure everyone is clear and in agreement.
I think it is wonderful and generous gift to be able to help your children out financially when they buy their first home. As an advisor, it is my job to make sure that you understand what your options are, how they will impact your own plans and what happens if something you don’t expect occurs.
P.S. If you would like to have a chat about your own situation, I would be happy to hear form you. You can book a zoom or phone call by clicking here: Book KB 15 MinutesJoin My Newsletter
THIS ARTICLE IS PROVIDED AS A GENERAL SOURCE OF INFORMATION ONLY AND SHOULD NOT BE CONSIDERED TO BE PERSONAL INVESTMENT OR LEGAL ADVICE. READERS SHOULD CONSULT WITH THEIR FINANCIAL OR LEGAL ADVISOR TO ENSURE IT IS SUITABLE FOR THEIR CIRCUMSTANCES.