Now Offering
In-Person &
Virtual Meetings

Book Now Book Now

Helping Your Child’s Home Buying Dreams Become a Reality

Helping Your Child’s Home Buying Dreams Become a Reality

Parents helping with the down payment

Helping your child buy a home has become a viable option for many Canadians whose millennial children find the dream of home ownership slipping out of reach. According to a 2022 report from the Ontario Securities Commission (OSC) on Millennials and the Markets, only 33% of millennials currently own homes, despite 56% considering home ownership a top financial priority.

Parents are increasingly stepping in to offer financial support, striving to turn this dream into a reality for their children. If you’re one of these parents, I’ve outlined some different ways for you to help out.

Helping Fund Your Child’s Home Buying Dreams Is A Great Idea But Put Your Financial Future First

Consider the metaphor of tending to your own garden before helping others with theirs. Just as you ensure your plants are thriving before lending a hand to your neighbour’s garden, it’s crucial to secure your own financial stability first. Factor in considerations like retirement planning before extending assistance to the next generation as tough a pill as that might be to swallow.

While it’s common for parents to tap into their home equity to aid their children in purchasing homes, it’s a move fraught with risk. Refinancing your home to provide financial support puts your own financial future at stake, especially if the housing market experiences a downturn and your home’s value diminishes.

There Are Other Ways To Help Your Children Buy Their Dream Home Aside From Buying It For Them.

Once you’ve carefully evaluated your financial position and determined your ability to contribute to your child’s home purchase, you need to think like an investor. Deciding whether your assistance will take the form of an outright gift or a loan will have a large impact on your decision. And, these aren’t the only ways that you can help out. You could…

Making Their Down Payment A Gift

While you may have a history of showering your children with gifts for birthdays, graduations, and holidays, gifting a down payment involves working with a slightly more intricate set of rules. It’s advisable to consult with your mortgage broker for precise guidelines. In broad terms, a gifted down payment typically must originate from an immediate relative and must genuinely be a gift. This may entail signing a declaration affirming that the funds are indeed a bona fide gift and that they are not expected to be repaid.

You could view the act of giving a down payment to your child as a “living inheritance” and it’s a perspective worth considering. Essentially, it involves passing on money to a child or grandchild during your lifetime rather than through a will. Opting for a living inheritance can have several advantages. It allows children to access the funds they would have received through a will sooner, allowing them to buy a home while they’re still young. Additionally, since gifts are not taxed in Canada, even a substantial down payment gift won’t be subject to taxation as income.

Loaning Your Child Their Down Payment

If making their down payment an outright gift isn’t feasible, offering a financial loan could be a viable alternative. By lending money to your children for their home purchase, you establish an expectation of repayment in the future, which can help safeguard your own financial stability and retirement plans. You might opt to offer the loan at a lower interest rate than the mortgage rate, thereby assisting your kids in saving money. However, lending money entails various considerations.

Although you’re not a bank, lending money to your children for a down payment involves financial matters that necessitate clear terms. It’s crucial to thoroughly discuss and mutually agree upon expectations for the loan, including the amount needed, the agreed interest rate, and the terms of repayment. Additionally, it’s essential to assess the potential impact of the loan on your finances. For instance, you’re obligated to report interest earned on the loan in your tax return. And, it’s important for your child to note that a loan from you does not constitute their own down payment, which could result in additional charges from the Canada Mortgage and Housing Corporation.

Becoming a Guarantor Or Co-Signer

If neither a gift nor a loan to assist with a down payment aligns with your financial circumstances, parents can still assist their children in entering the housing market by becoming a guarantor or co-signer on the mortgage. As a guarantor, you enter a special type of mortgage agreement alongside your child, committing to payment only if the homebuyer defaults, unlike a co-signer who shares repayment responsibility.

While serving as a guarantor leverages your solid credit and standing to support your children, it comes with inherent risks. Before assuming this role, thorough discussions with your child regarding their financial situation, budget, contingency plans, and ability to manage unexpected expenses are imperative. Despite potential discomfort, these conversations are crucial as being a guarantor hinges on a high level of trust.

If you opt to co-sign the mortgage, you’ll be listed on the property title, offering the advantage of assuming liability and gaining ownership. However, this means lenders will scrutinize your credit history and income in addition to your child’s. Should your child default on payments, your credit rating could suffer, and you’ll be fully responsible for mortgage repayment. It’s vital to recognize that this arrangement may affect your eligibility for future loans as well. Additionally, the government may view this as an investment, potentially subjecting you to capital gains tax when your child sells the property.

Co-Buying The Property with Your Kids

If you’re eager to assist your child in purchasing a home while also maximizing the return on your investment, co-buying could be an attractive option. In this arrangement, both you and your child contribute a percentage of the down payment, and you jointly cover ongoing expenses. Upon selling the property, you’ll share any appreciation in value, or conversely, shoulder any losses.

When determining each party’s share, it’s essential to consider factors such as whether your child benefits from residing in the home and if they contribute to its upkeep. I would also advise thoroughly outlining the details of the arrangement to prevent potential issues down the road. 

If They’re Selling A Home and Buying A New One, Offer a Bridge Loan 

If your adult child is in the process of selling their current home to upgrade to a new one, they might find bridge loan assistance helpful. This support can prove especially valuable if their new mortgage is contingent on their old property being under contract by the closing date. By having a contingency plan for short-term financing in case the property doesn’t sell in time, they can avoid unnecessary stress and prevent the need for a rushed home sale. The beauty of bridge financing lies in its temporary nature; which means you won’t need to part with your funds for long. Also, if their current home sells as planned, you won’t need to provide any financial assistance at all.

You Could Help By Paying The Deposit

Within 24 hours of their offer being accepted, your child will be required to submit a deposit to the seller’s brokerage. This deposit subsequently becomes part of the down payment upon closing. The standard amount for this deposit varies significantly across Ontario – in Barrie, for instance, it typically equates to at least 5% of the purchase price.

However, for many first-time buyers, their down payment is tied up in RRSPs and isn’t readily available without a little extra work. As a result, it can be challenging for your child to come up with the required 5% within the tight 24-hour timeframe depending on how quickly the deal is processed. This is where your support becomes invaluable. By providing them with a loan to cover this amount for the interim period until closing (typically 60 or 90 days), you offer significant assistance to help them buy their first home. The best part? You’ll be reimbursed on the day of closing.

Covering The Closing Costs Is An Option Too

Another way to help your child buy their dream home is to help with closing costs. Land transfer taxes, legal fees, inspections, etc. can eat up a lot of cash which they may not have budgeted for originally. This is less of a financial commitment for you but a big help to your children when they have so many other expenses to worry about especially if they want to make a few renovations or perhaps plan to buy furniture.  

Make Sure Your Kids Understand That Buying A Home Is A Major Commitment For Both Of You Before Signing Anything

Regardless of the approach you take to help your children purchase a new home, it’s important to engage in thorough discussions about your level of commitment and involvement in the home buying process. Effective communication ensures that both you and your children enter the situation with clear expectations. These conversations also create a better understanding of whether your child will uphold their responsibilities and appreciate your assistance.

Whether you’re providing a gift or a loan, it’s important to consider the extent of your involvement in the home buying experience. Are you simply providing financial support and allowing your child to make their own decisions, or do you wish to have a say in the investment? Do you anticipate attending open houses with them? Buying a home is inherently stressful, and discussing these matters early on can help prevent potential conflicts between parents and children later in the process. Detailing everything to do with the financial assistance also is crucial in avoiding disputes later on as money discussions can escalate quickly if everyone is on a different page and emotional stress is heightened.

Most Importantly! Call Me To Get The Advice You Need To Help Your Child Buy Their Dream Home

In the complex journey of helping your adult child buy their dream home, having the right guidance can make all the difference both to yourself and to them as they secure their first mortgage. As your trusted mortgage broker, I bring unparalleled expertise and personalized support to ensure a smooth and successful homebuying experience. With my assistance, you can rest assured that you will get the best mortgage rates and options for your unique situation as I have many more solutions to offer you beyond what the banks have access to. Reach out to me today at 705-315-0516, or book a consultation with me by clicking this link, and together we can find the best way to help your child and keep your finances secure.

× Close this modal popup