Housing is expensive in 小蓝视频, there’s no denying it.
As a result, many parents are considering pitching in to help their children buy a home. This can be a beautiful and meaningful experience for both parents and kids, but there are some things to take into consideration before making this decision.
We asked , CEO and founder of and , a mortgage broker at Powerhaus, for their advice on helping your child buy a home.
Giving a gift of cash
A common method to help a child buy a home that many parents choose is assisting with the down payment. According to Schindler, “A lot of parents don't want to co-sign on the mortgage, and the reason being that is because they have to provide all their income information, which is, you know, somewhat intrusive, inconvenient, but also they have to have their credit bureaus pulled.” So they choose to give their children money instead to reduce or eliminate the down payment their child has to hand over.
Gifting money toward a down payment is relatively straightforward — you can give as much as you want. For the kids, Winn says that it’s as simple as meeting with a and “let[ting] us know that their down payment is coming from gifted funds. And basically, we submit a letter to those parents, based on the lender — [each] has their own document. So Scotia[bank], for example, has their own gift letter.”
As Winn points outs, banks and other lenders are prepared to handle gifts and have documents to fill out if you choose this option. These documents exist to reassure the lender that the amount you are handing over is truly a gift, that the money is legitimately obtained and that you don’t expect it back (which would make it a loan instead).
Leveraging the parents’ income or credit
If parents don’t have the cash upfront to help with a down payment, or that won’t be enough to net your child a home, there are still other options.
One alternative is co-signing a mortgage along with your children. Schindler says that, “co-signing means that now it's not just the child's income that's qualifying for the mortgage, it's also the parents' income.” That, along with the fact that parents often have better credit than their children could increase the mortgage children can qualify for. This option is easy and straightforward, but it has its pros and cons.
“When you co-sign for a mortgage, you're actually co-signing for 100% of it,” says Schindler. “So, the lenders will never let someone off the hook and say, oh, yeah, that's your son's problem.” That is, if your child is unable to make payments, the lender can come to the parents. Keep this in mind when co-signing.
But there is even more that parents can do for their children. These options involve accessing the equity in the parents’ home.
Equity takeout loan
An equity takeout is a loan taken from the equity of your home and received as a lump sum. You then make payments to repay both the principal and interest. Unlike a reverse mortgage (described below) there is no age requirement to take out an equity loan.
This approach is useful for younger parents, who may want to help their children buy a home but do not meet the requirements for a reverse mortgage. But keep in mind that you have to make payments on this loan. You could work out an arrangement with your children where you both pitch in, or one of you handles the interest and the other the principal payments.
But if you meet the requirements for a reverse mortgage, they have some advantages.
Reverse mortgage
A reverse mortgage is a loan available to homeowners, usually those 55 or older, that allows you to borrow money from your home’s equity without selling your home. This approach lets parents access tax-free money. Most often, you can borrow up to 55% of the current value of your home.
Schindler explains that, “a lot of people are doing reverse mortgages because they're taking out a lump sum of the equity, and then what they're doing is they're gifting it to their kids. Let's say they have more than one [child]. There's a hundred for you, a hundred for you, a hundred for you. So, [parents] are basically giving [their children] their inheritance early, right?”
Both Winn and Schindler note that there are lots of misconceptions about reverse mortgages. Namely, while they do accrue interest, interest rates aren’t as high as many expect, hovering around 6%, which is the same as many other mortgage products.
“The interest is six-something percent, which historically, as we know, is a pretty average rate over the last 30 years,” says Schindler.
And while you may feel like you’re reducing the equity in your property, keep in mind your home will still increase in value over the years, and so will your child’s home. In fact, your child could sell their home in five to ten years as their family grows and take the proceeds from the sale to up-size or move to a more desirable area.
Furthermore, they say that a reverse mortgage won’t lead to the loss of your home, as long as you keep it maintained and continue to pay all taxes and fees. Nor does it mean eating into the finances of the parents, and in fact it often helps protect parents when helping their children buy a home. That’s because you don’t have to make monthly payments on a reverse mortgage.
“They're charged a premium on rate and that's not paid back until the parents sell the home or they're deceased,” says Schindler.
“If you are thinking like, ‘OK, I have this property and I have all this equity in it, but I don't want to sell my property yet, but I want to help my kids,’ [then don’t] be scared of a reverse mortgage,” says Winn.
Don’t forget about yourself
There are some considerations for parents in all of this as well. Namely, you want to be fair to all your children if you have more than one, so ensuring you can help each of them buy a home is a good idea. Otherwise, bad feelings and resentment can develop.
“小蓝视频 courts, especially estate tax and the law will allow the beneficiaries to contest any will or any previous gift to any of the individual siblings. So, the parents want to be very aware that they're being fair with each individual,” says Schindler.
Therefore, both Schindler and Winn advise that you consult a lawyer and get everything in writing. “We as mortgage brokers, we're here to help them find the solution and offer the options but we're never here to give them [legal] advice. So, any type of situation where it involves a parent and a child, we need to refer them to a lawyer or notary,” says Schindler.
For instance, if you help your child buy a home and they end up in a relationship that becomes a common-law marriage, that third party now has financial obligations and entitlements. If the relationship ends, there may be financial repercussions for both the parents and children. Schindler recommends a second charge on title, reviewed by a lawyer, in case this scenario occurs.
Also, remember your own financial needs when helping a child buy a home, especially if you have multiple children. You’ll still need funds for your life, and if you’re retired or on a fixed income, keep this in mind when considering how much to give. Work with your mortgage broker to understand the options available to you.
And a word of advice for children receiving help from their parents when buying a home. Winn remarks that “It's just such a gift to be able to get your kid into a property. And that creates wealth for generations.” The property market is hard to get into in 小蓝视频, especially in Metro Vancouver, and having parental help is not something to be taken lightly.
With housing prices so high in 小蓝视频, helping your child buy a home is a great way to set them up for a better future. But since it can be a complex and emotional financial decision, is a great way to ensure you understand all your options and choose the right one for you and your family.
