Parents should seek expert advice before making big decisions about helping kids purchase a home
When Laura Parsons and her husband decided to help their adult children with home ownership, they carefully considered the best method.
For their son, the Parsons gifted money, as an early inheritance, over a two year period. He then deposited the funds into an RRSP, which allowed him to generate immediate tax savings, and later, make a tax-free down payment on a home, utilizing the Canada’s Home Buyers’ Plan.
It is strategy not all parents are aware of, but as BMO Financial Groups’ vice president Mortgage Specialists, Parsons knows the benefits and has even led seminars on the topic.
Parsons says that parents wanting to help a child buy a home should first seek advice from experts, consider the consequences, and find a plan that works best for all parties involved.
She says a BMO survey a few years ago found that 42 per cent of first-time home buyers were counting on financial assistance from their parents for a down payment. While many Baby Boomers have the financial means to help with a down payment, she cites other strategies, such as co-signing a mortgage, if the child has the money “but not the credit.”
Nicole Wells, vice president of Home Equity Financing with RBC, says while high real estate prices have made buying a home difficult for young people, they have benefitted their parents.
The increase in property values that parents are experiencing as they start to get out of the market makes this a common practice – to leverage some of the equity that they have earned in their property and give their children what’s called a living legacy.
“The increase in property values that parents are experiencing as they start to get out of the market makes this a common practice – to leverage some of the equity that they have earned in their property and give their children what’s called a living legacy,” said Wells.
Wells also says most people can save the minimum five per cent for a down payment, but with their parents help can increase that down payment to avoid mortgage insurance costs and reduce the cost of home ownership.
According to Wells, there are other ways parents are helping, such as allowing a child to move back home to reduce costs and save down payment faster. But if parents want to make a direct financial contribution, they need to “understand what impact that money will have on their retirement and long term goals.”
“So it’s really important they sit down and talk to a financial adviser about the possibility of giving a living legacy to their kids, and to see what else they can do,” said Wells. “They can talk about whether they want to be a guarantor, or invest in part of the property and get some payments.”
Parsons says there are many ideas and programs out there, so it’s wise to have the advice of mortgage specialists, financial advisers, accountants or lawyers, before going forward.
“Go in as a family, so you all can ask questions and so you can all uncover what the options are. Then you can have a great discussion on what route you want to take,” said Parsons.
Wells notes both parties need to agree to the roles each will play, such as whether the parents would have a say in the type of home purchase, “so you’re both clear on the expectations.”
“You don’t want to ruin a relationship.”