Parents take great joy in watching their kids succeed as they grow older - especially when it comes to all of life’s major milestones. Of course, one of the largest of those milestones is seeing them buy of their first home. If you’re looking to help your kids take this important step, here are a few ideas to help you get them on their way to home ownership.
1. Loan Them Money
As parents, we often joke about the ‘Bank of Mom and Dad’, but in this situation, it may actually be the best way to help your child own their first home. While this is probably the easiest way to help if you have the financial means to afford it, there are some things you should consider:
By providing them with a loan for the down payment, the entire purchase price, or other costs, you will be able to provide them with a lower interest rate than they would receive from their bank. In determining what type of interest rate to charge, take into consideration what rate their bank was going to provide, as well as how much interest you would earn if you just kept the money in your bank account.
While it may be tempting to charge them no interest, there will need to be some incentive for them to pay you back (plus, a life lesson). However, if you do charge interest on your loan, be sure to report that as income on your taxes. Also keep in mind that even if you loan them money, your child will still need to pay a surcharge on mortgage insurance.
2. Give A Cash Gift
A once-in-lifetime monetary gift to your son or daughter is another way to help them buy their first home. Of course, this means they will be able to purchase much sooner than if they had to save for a down payment, allowing them to build up equity in their home that much faster. However, If you decide to go this route, you and your child will have to produce documentation signed by both of you, stating the funds are a gift and are not to be paid back.
3. Gift Them The Entire Home
You could also consider giving your second home or a vacation home as a gift. But beware: while Canada has no gift tax, if a property is gifted to anyone other than a spouse it's considered the same as being sold at fair market value. If the property has substantially altered in value between the time it was purchased and the time it's given as a gift, the difference may incur capital gains tax.
4. Rent To Them
There is a longer-term solution you can enter into if you wish to help your kids become homeowners. You may choose to purchase a property yourself and rent it out to your child. This is a great option if they have poor credit and aren’t able to be approved for a mortgage, or if they simply don’t make enough to qualify.
While you could rent to them indefinitely, you could have them slowly pay off the mortgage of the home with their rent payments. This is a long-term solution, and may also help your child with financial management.
With an arrangement like this, you’ll want to keep in mind that you are becoming a landlord. Consider whether your relationship with them could handle the stress of this new dynamic. Also, be sure to get them to sign a lease that stipulates the rules, just as they would have to in any other rental situation.
5. Co-Sign A Mortgage
It is possible to co-sign a mortgage loan with your child, but remember this type of assistance could affect your credit score or finances. If your child defaults on the mortgage, as a co-signer you will be liable for the mortgage payments. Also, consider that your name will also be placed on the title of the property. If for whatever reason, legal action is brought before the homeowners, that will include you as well.
6. Protect Your Finances
In an effort to help your kids in any way you can, you may be tempted to dip into long-term savings funds, such as retirement, RRSPs, sell bonds etc. Try to resist this temptation.
You won't be helping your children if you risk your own financial security as doing so can place undue stress on your relationship. This may also mean your kids, in turn, stretch their finances in order to assist you.
7. Match Their Investments
If you want to encourage good future investment behaviour in your children, or if you're concerned about their ability to save or manage money, you could also consider matching any investments they make with contributions of your own. This could be done as they make payments or at pre-determined milestones - once every six months or once per year, for example - or once they hit a specific dollar amount.
It may take a little longer for your children to save this way, but it builds good habits and can be far less stressful than dealing with a big lump-sum of money all in one go.
8. Don’t Set Them Up For Failure
While there are things you can do to help your children buy their first home, keep in mind less is more. For example, by providing them with too much money for their purchase, you could be actually hurting them more than helping them.
Whether it's a financial loan or gift, your children may end up purchasing a home they realistically cannot afford on their own.
If they will be spending more than 32% of their monthly income on housing, they have stretched themselves too thin. By asking them whether they can afford to sustain the cost of the home purchase ahead of time, you can ensure they won’t become ‘house poor’.
If you’re looking to help your kids in purchasing their first home, be sure to take the above into consideration ahead of time. Knowing what to expect will not only ensure a smooth transition for your children into their first home but will help you avoid any unforeseen surprises along the way.
For more information on the resources available to first-time homebuyers, check out our previous post, "Down Payment Help: 5 Options For First Time Homebuyers".
Originally posted January 6, 2017, updated November 13, 2018.
