Can I afford to help my child buy a home?
They say the three most important words in real estate are “location, location, location.” But as new homebuyers are increasingly priced out of major markets, location has taken a back seat to the need to put together a down payment before prices rise further.
To help make that dream a reality, parents are increasingly looking for ways to help their kids get into the real estate market. An Abacus Data poll for the Ontario Real Estate Association in 2022, for instance, found that 70% of parents said they provided some form of financial assistance to their kids for their down payment.1
For many families, that financial support can reach into the tens of thousands of dollars. The tricky part for parents is figuring out how to offer support without sacrificing their own dreams and financial security. Fortunately, there are more than a few ways to help the kids get a leg-up on the housing market.
Take your financial temperature.
Unlike saving for a child’s education, setting aside money to help your kids own a home is not common, meaning an unplanned expense that could have an outsized impact on your retirement savings. Before helping your kids, take stock of your overall financial situation, including income, expenses and retirement goals.
As a starting point, consider you’ll likely need about 70% of your working life income to maintain the same standard of living in retirement; for many Canadians, that means saving up about nine times your annual income before you finish work. Unless you already have savings set aside to lend or gift to your kids, taking money from your retirement savings today means your investments will have to perform better tomorrow to meet your goals, or you may have to lower your spending expectations in retirement
Tax-effective ways to help out
Once you’ve determined your retirement is secure, or at least on its way to being well-funded, you can turn your attention to helping your child. A simple way to do this is a one-time gift of all or part of a down payment. There is no gift tax in Canada, which means that immediate family members – a parent, grandparent, sibling or another close relative – can receive any amount as a gift and not have to pay any tax.
Even though there may not be any tax implications for a gift, when a lot of money is changing hands, it is always prudent to talk with an accountant, lawyer or tax professional. For instance, a lender may ask for a signed letter to confirm the source of funds that have been deposited into your child’s account are in fact a gift. Depending on the circumstance, those funds may need to be deposited at least 15 days before closing, this can be longer based on different lender preferences with 60+ days not being uncommon. Adequate planning well in advance of seeking mortgage financing is advised.
Rather than giving money at the time of purchase, you could also give funds to a child that could go towards a Tax-Free First Home Savings Account (FHSA), which allows first-time homebuyers to contribute $8,000 a year, up to a maximum of $40,000. Since FHSA contributions are tax-deductible, that could give your child an added boost, as they will benefit from both your gift as well as the tax savings, making your money go even further. It’s worth noting that there are no taxes on growth within the account, and the money can be withdrawn tax-free if it’s used to purchase a home. If your child is married, both spouses can open FHSAs, doubling the limit.
Some frugal alternatives
If giving a significant sum isn’t feasible, there are other ways to help ease the path to homeownership for your children.
One option is to co-sign their mortgage, which could help them qualify for a larger loan at a better interest rate. This could result in significant savings over the course of the repayment, and it is a way to leverage your financial history to help out without spending your own money. However, it is important to understand the liability implications of this decision, as you could be on the hook if your child defaults on the mortgage.
An alternative approach could be to lend your child money for a down payment and charge a lower interest rate than a bank would. However, this should not be a simple handshake agreement; it’s important to do the necessary paperwork, such as entering into a promissory note or a mortgage agreement. This could help protect your assets in the event of your child divorcing, or if your child is pursued by other creditors. Keep in mind that you’ll need to declare the interest from the loan on your tax return.
Helping your children improve their credit score can also benefit them by improving their access to credit. This could be accomplished by taking a more hands-on approach with your children’s finances, encouraging responsible money habits and ensuring they prioritize paying bills on time.
Another possibility is to help cover other expenses your children might have – like the cost of a wedding, an auto loan, their education or potentially your grandchildren’s education – freeing them up to save more for their future home.
Things to keep in mind
Helping set your child up for success can be incredibly rewarding, but it’s important to remember the risks. For instance, if you provide direct financial assistance and your child is married or in a common-law relationship, consider how a separation would affect the intent of your gift.
Without taking steps to protect the gift, a separation could mean any equity in the home gets split evenly between your child and the departing spouse or partner, regardless of whether that asset was purchased with your assistance.
