Home buying with the help of Mom and Dad, or to put it another way:
Is the Bank of Mom and Dad open for business?
Over the past few years, many first-time homebuyers have been banking on mom and dad to lend a financial hand. While there are many rewards with helping your son or daughter achieve their dream of homeownership, there are lots of things to consider as well.
According to a recent survey by the Ontario Real Estate Association, four in 10 parents of homeowners aged 18 to 38 years gave their child financial assistance to purchase a home. Of those, 44 per cent used their own savings and 15 per cent withdrew from their own retirement funds or investments. On average, parents who loaned the money to their children paid $40,878 and those who outright gifted the money paid $73,605.
The most straightforward way to help is to gift the money to your child but if your son or daughter is purchasing the house with a partner, carefully consider what happens to the value of your gift if the pair one day separates.
Some parents believe that if their child’s name is the only one on a home’s title, their son or daughter will keep the house in the event of a breakup but that’s not the case. Once the mortgage debt is account for, the ex-partners split the remaining equity down the middle, which means your child gets no credit for what you put into their matrimonial home.
A better option might be to draw up a marriage contract or cohabitation agreement (either of which can be signed after the fact). Such an agreement should specifically state that if the couple receiving the money breaks up, the cash will be returned to the person who gave the gift, either as a lumpsum or a percentage of the equity. The remaining equity gets split evenly between the former partners.
RULES FOR ACCEPTING GIFTS
The first rule of accepting a gifted down payment is that it must come from an immediate family member, such as parents, siblings and grandparents. The buyer will need to provide a ‘mortgage gift letter,’ which is a template customized for the mortgage lender or bank that’s funding their home and provides such information as the name of the person(s) providing the gift, the amount of the gift and proof the money being gifted has been transferred to the buyer’s account.
The lender wants to confirm that the money is a gift with no obligation to be repaid. It becomes a little more complicated if the buyer is self-employed. In that case, they’re required to put up five per cent of the down payment themselves. There’s no gift tax in Canada so regardless of how much you give, neither you nor the recipient is required to pay taxes.
Another option is to co-sign or guarantee your child’s mortgage. But in doing that, you’re assuming responsibility if he or she can’t pay their mortgage, which could potentially put your financial future at stake. Instead of gifting the money, you could structure it as a loan to protect your assets but make sure you fully understand what that entails.
WILL A GIFT DERAIL YOUR PLANS?
Before committing to help with a down payment, ensure the sum doesn’t derail your own financial goals. Would you have to delay your retirement? Would you need to be more aggressive with your investments and are you comfortable with that?
If you refinance your home, will you face larger mortgage payments and how would that impact your day-to-day budget? If you sell an investment that has risen significantly, you could face a hefty tax bill if you don’t have other losses to offset the gains at tax time. If you borrow the money, you’ll be charged interest and need a plan to pay it back.
Of course, there can be financial benefits to providing a ‘living inheritance’ to your kids. Cash gifts will ultimately reduce the size of your estate, reducing probate fees costs and taxes on the estate while also allowing you to enjoy watching them benefit from the fruits of your labour.
WHAT ABOUT YOUR RELATIONSHIP?
Remember that mortgage payments are only part of the total cost of homeownership. Are you confident your child and their partner can keep their end of the bargain, such as property taxes, utilities, insurance, condo fees, maintenance costs and emergency repairs?
Finally, give some thought to how gifting or loaning your child money might impact your relationship. Gift givers might feel frustrated by what they perceive as a misuse of their gift. Gift receivers, meanwhile, might feel frustrated if there are strings attached to a gift, such as expectations and rules.
The scenarios surrounding the so-called Bank of Mom and Dad are numerous and go beyond the examples provided here. Ultimately, it’s important to do your due diligence and ensure whatever decision you reach is right for you and your family. When it comes time to look for a house, please know I will work diligently with you to find you the home that meets your budget and needs. Feel free to contact me.
This blog provides information only and should not be construed as financial or legal advice.