Helping Your Kids Buy A House

The Ontario Association of Realtors conducted a poll and found that forty percent of parents of young homeowners help their kids buy houses. It also found that ninety percent of all parents polled agreed that it is harder to buy a home now than when they were purchasing the property.

We’ve been working with new buyers for several years, and the 40% seems like a low estimate to me. Most of our clients get some sort of financial support from their parents.

Do you know what comes along with that support? A whole lot of shame. Our clients often believe they are the only people in the Toronto market who need financial help from their parents. They often whisper this tidbit of information to us with an embarrassed wince.

Cash gifts from parents are becoming even more common now with lower prices and higher interest rates. Cash is worth more than it was even last year. A gift or low-interest loan of cash can dramatically affect your child’s affordability.

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While adult kids often feel embarrassed, we’ve noticed that parents are generally quite happy to help their kids out. Buying a house in Toronto in the past few years has been extremely difficult to do, even if you make a decent income and have been regularly saving. House prices outpace average wages and interest rates make qualifying for a mortgage difficult.

The most common question parents ask us when they’re about to help out their kids is how to structure the financial arrangement. This is a question for a financial planner or a mortgage broker, but here are four common structures to consider:

1. A Loan

This functions like a mortgage on the home. The interest rate and loan repayments are up to you. You can register the loan as a second mortgage on the property, which gives you a certain amount of legal protection. Or, you can make arrangements with your kids separately.

2. A Gift

Very straightforward. You give your kids money. They say thank you. You have the ultimate argument-ender for the rest of your life.This is the most generous and also the most fraught option. Large financial gifts can come with unspoken expectations. It is best to speak these expectations out loud before you and your children agree on the gift. Is your $100k contingent on weekly visits from the grandkids? Don’t leave that bit in the dark, or you will become resentful in a few years.

3. An Advance on Your Will

A bit grim, but this is how I’ve seen most financial gifts happen between children and parents. Suppose you have significant wealth and are reasonably assured that much of that wealth will be left after you die. In that case, you can forward some of your kid’s inheritance to them and then subtract that amount (plus any interest you may want to add) from the amount that your child will be paid out in the will.

4. As a Co-Investor

You could decide to be a co-investor in the house with your child. That way, when your child sells their home, you get your initial investment back, plus extra after you factor in how much your initial investment has grown. For example, if you invest $100,000 into the home and the market increases by 30% when your children want to move on, you’ll make $30,000 on that investment. Not a bad way to make some money! The downside is unless you kick your kids out of their home, your money is tied up until they can either refinance or sell. Also, if you’ve been on title you will owe capital gains tax when your children do sell for the portion of the home you owned (assuming you don’t live there. Primary residences are exempt from capital gains taxes). If your kids decide to refinance and pay you out one day, they will need to pay land transfer tax on the amount that they pay out to you.

How to Help Your Kids Buy a Home without Giving Money

A fifth way to help your adult children out without giving them money, is to help them qualify for the mortgage by going on the title of the house. This often helps people who are self-employed and make a lot of money but have more stringent loan requirements at the bank. It is important to only do this if you are confident that your child can pay the mortgage. If they can’t, the bank is coming for you.

Here’s the most important question you should ask yourself. Does this gift or loan put you in financial stress? Are you refinancing your own house to do this? Is it jeopardizing your retirement plans? If yes, walk away.

Before you make any decisions, make sure to speak with your financial advisor and your estate attorney. They will advise on the ins and outs of these relationships, especially as they relate to paying capital gains taxes if you are a co-investor.

To learn more about helping your children buy a home, call us at 416-788-1823 or email today.