Montreal Gazette

Hope for getting a home

- CHRISTINE IBBOTSON Christine Ibbotson has written four finance books, including the bestseller How to Retire Debt Free & Wealthy. info@askthemone­

With housing pricing soaring in every province as we ease our way out of COVID, many people are thinking they now simply cannot afford to get into the market. The federal parliament budget officer, Yves Giroux, projected that the number of households in need of an adequate or affordable place to live would increase to about 1.8 million within five years unless more funding flows toward the problem. So how can we help out our children to get into the housing market?

Why not consider taking out a collateral charge on a home that you purchase with your children? I have written about the benefits of a collateral charge before and now is a great time to use it. A collateral charge is a financial planning tool secured against a primary residence for 100 per cent of its current value. It has no term or renewal and is fully open, extremely flexible and — for the right client — offers complete freedom.

You can easily set up the percentage of ownership for all purchasers and it is an ideal way to help out a child wanting to get into the real estate market. This is also a great way for parents to acquire a tax-free investment while feeling good about assisting a family member. Here's how it works:

If you wanted to purchase a home with a child for perhaps $500,000, the parent(s) would come up with the 20 per cent down payment and the collateral charge will have all the owners on title, the child and the parent(s). The collateral charge will have a mortgage loan segment set up for $400,000, amortized over 25 years. The child would make these payments along with all other expenses, such as taxes, maintenanc­e, heat and hydro, etc. This would become the child's primary residence with the parent(s) as

20 per cent owner(s). There should also be an agreement drafted by a lawyer at the time of purchase to fully detail all terms, conditions and a directive if one or more of the owners dies before the contract ends.

It should be understood by all parties to the agreement that the mortgage cannot be refinanced or changed, and the property is to be sold at a predetermi­ned time in the future, let's say five years. When the property goes up in value and is sold in five years, the parent(s) get the 20 per cent investment out of the sale proceeds, with the balance of the proceeds going to the child to purchase their own home without the assistance of the parent(s).

A collateral charge should also be considered for those that have a traditiona­l mortgage format.

The reason I want you to consider it is two-fold. If you have a mortgage, line of credit or consumer debt, placing it in a collateral charge structure will immediatel­y fast-track the payoff since the interest is calculated differentl­y from any other loan format. It is a “true pay-for-whatyou owe,” calculatin­g the interest on the outstandin­g balance each month.

The other reason to consider this product is that it has no term or renewal — so if you were to get it today, you could keep it for the next 20 to 30 years and never have to qualify again. Hence the reason we recommend it for estate planning. When you are getting close to retirement, you are usually planning to live on a much lower income and if you need access to money for an unforeseen event (perhaps for a new car, home reno or an emergency reason) you now have it. The alternativ­e could be going into your bank and applying for a loan at a time when it is difficult to qualify. Your collateral charge never changes, nor does it expire. You could keep it for many years with a zero balance, but if you need it, you can easily draw down what you need and meet your emergency requiremen­ts at that time.

When you retire, you still want to have access to credit if necessary and you never want to be put in a compromisi­ng situation. When planning for the future, it is sometimes a good idea to set things up properly so that you have options and freedoms that ensure your comfort, dignity and security as you age.

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