The risks of helping your kids buy their first home
Helping a child purchase a home is a decision that shouldn't be rushed
As housing prices hit an all-time high and continue to rise across the country, home ownership is out of reach for about three-quarters of Canadians, leaving many new homebuyers counting on the Bank of Mom and Dad.
“With the housing market pricing many Canadians out of the market, younger generations are forced to turn to their parents to close the gap,” says Manulife Bank president and CEO Rick Lunny.
If you're thinking of helping your child purchase a home, be sure you clearly understand your own financial situation before being “swept away by emotions” and fears your child will never be able to purchase a house without your assistance, warns Barbara Knoblach, a money coach and financial planner with Money Coaches Canada.
“Such a decision, if made in a hurry — and in some cases with an inkling of panic — has a good chance of producing a very poor outcome,” she says. “In my experience, it is a minority of clients who are so well situated that they can easily afford to provide major sums of money as a down payment.”
If you decide to help, the most straightforward way is to gift the money to your child. But remember, if your child is married and one day divorces, 50 per cent of the funds you gave would go to their spouse unless you take steps to safeguard against that.
Another option is to co-sign or guarantee your child's mortgage, though that means you assume responsibility if your child can't pay their mortgage. That could put your financial future at risk.
“It also means that the parents will have taken on a major debt obligation, which could impair their own ability to secure other loans in the future because they may no longer qualify,” Knoblach says.
Instead of gifting the money, you could structure it as a loan to protect your assets and could choose to forgive the loan in the future, perhaps as part of estate planning. “In many instances, Canadians are passing a portion of their wealth to their children and sometimes their grandchildren while they're still alive,” she says.
“This makes a lot of sense as the children need money early in life rather than later, when they may naturally receive an inheritance due to the death of the parents.”
A living inheritance allows parents to see the benefits their gift provides while also offering tax benefits.
“As giving of money is tax free, it's more advantageous to provide money via a gift than through a traditional inheritance, in which the deceased's estate has to pay taxes,” says Knoblach.
Remember, you can't demand the return of any money you gift, even if your child doesn't use it as intended.
“Parents should only consider gifting or lending money to a child who is very serious and committed about the financial obligations they're about to enter. If the child has a tendency to squander money, this is clearly a red flag that should preclude the parents from entering such an arrangement.”
If you're able to afford a second house, another option is to purchase it in your own names and rent it to your child.
“At a later point in life, when the child has reached more financial maturity, a change in ownership could take place, such as through a rent-to-own agreement or via a traditional inheritance,” Knoblach says. “By no means should parents put themselves into the same boat with a financially irresponsible adult child just to allow the kid to make a property purchase.”