It’s innate for a parent to want the best for her children. No wonder so many of us contemplate if we should help them buy a property. The idea of our grown kids becoming homeowners is linked to our desire to see them thriving and financially secure. And, yet, the ability to become a first-time homeowner feels almost unattainable, particularly in the larger cities in Canada.
Take, for instance, the current average price for houses in Metro Toronto. While two-bedrooms sit at about $845,000, the average price for all detached homes is closer to $1.2-million. In Vancouver, that price climbs to $2.1-million. Condos appear more affordable — with Toronto’s average condo price at $615,000 — but the price tag still feels astronomically high for a first-time buyer. Look elsewhere — such as Calgary, AB, with an average price for all property types sitting at $464,000, or Barrie, Ont., where the current average price $482,000 — and prices can feel more realistic, but it still requires your child saving up at least $23,500 (for 5% down on a property priced under $500,000). That’s a lot of money, particularly for a young adult who is probably negotiating student loan debt while still just starting to build her career.
One option is to hold off on buying a home. But this could backfire. If rents are high in the city your child lives in, this will erode her ability to pay off debt and save a lump sum down payment. Then there’s the fear of continued property appreciation…
No wonder so many parents are stepping in to help.
Rule #1: Don’t Assume
First, figure out your motivation. Your aid might not be the best solution for your children, or for you. Remember, renting is no longer judged poorly. As a parent, you need to shrug off the notion that not owning a home is a bad thing. It’s a guilt-trip that can lead to poor decisions.
If helping your child to buy a property is your way of forcing your child to become financially responsible, you’ll probably be very disappointed.
Step #2: The Family Talk
Have an honest talk with your kids about your decision. Through this discussion, you’ll set the tone for how and why you want to help, but you also have a chance to learn how your child will respond. For instance, does your child expect you to help? If your child never learned to manage her money, she won’t learn as soon as she becomes a property owner.
Step #3: Should You, or Shouldn’t You?
A parent may feel guilty for saying “no” but there are good reasons not to help. The biggest one is that family and money just don’t mix. Just ask any one of the retirees dealing with adult-children who consider the “parental bank” to be always open for business.
Since a child’s money habits are, primarily, influenced by how you handle money, the best way to help her develop a healthy, mature relationship with it, is to deal with your own financial hang-ups. This includes saying ‘no’ and having an open dialogue about financial fears and concerns.
By jump-starting your kids into home ownership, you may not be doing them a favour.
Buy a property and you’re tied to that property. Lose a job? You’ll still have to pay the mortgage. Get a better job in a new city? You’ll have to come up with a plan for that property.
Step #4: Here’s How To Help
Make your child financially responsible for the purchase by requiring her to save up a portion of the down payment before you step in. This way you are all working together to achieve a common goal.
Consider having a signed contract which includes how much is owed, payment amount and schedule and the interest rate charged, if applicable.
Keep in mind that any debt your child has will affect her debt ratios — the difference between what she earns and what she owes. This ratio determines if she qualifies for a mortgage and how competitive of a rate will be offered.
Give a Gift
In Canada, you can give anyone a lump sum without it triggering any tax. However, as it is a gift, do not expect reimbursement. Only use this option if you are financially secure. Be aware that your child’s mortgage lender may ask you for documentation about where this money came from in light of increased vigilance regarding fraud and money laundering.
Become a Co-Signor
If you have a good credit record, consider leveraging it to help your child get a mortgage.
Remember that by co-signing the mortgage, you take legal responsibility for paying the debt. If your child cannot pay, you’re on the hook to the lender.