Money and family can be a tricky combo to manage, especially when comes to one of life’s most expensive purchases — buying your first home.
As tougher mortgage rules and high prices leave new buyers at a disadvantage, some parents are stepping in as the Bank of Mom and Dad to secure housing for their adult children. Canada’s Financial Planning Standards Council found that 33 percent of parents with children over the age of 18 have or intend to financially assist their kids with their first home purchase. The choice to gift money towards a downpayment or co-sign on a mortgage instead of leaving an inheritance is not always made for investment reasons alone.
“The primary reason is that parents what to see [their] kids enjoy the money while they are alive,” says Jamie Golombek, the Managing Director of Tax and Estate Planning at CIBC. “And also, to avoid going too much into debt and burdening the child with higher mortgage payments than he or she can afford.”
While providing monetary support can give adult children a leg up onto the property ladder, personal finance educator and consumer advocate for the FPSC Kelley Keehn says that there’s plenty of potential for something to go wrong without careful planning and professional oversight.
“It is complicated and should be given a lot of thought. It can unravel fast because there’s a lot of emotions and because it is a big decision and a big purchase in life,” says Keehn. “I think that’s where having some professionals on your side to help with that conversation, to help you see the blind spots of what you might not realize, is very important.”
If you’re considering asking mom and pop for a hand with your first mortgage payments, we gathered a few pointers from Keehn and Golombek on how to tap into the Bank of Mom and Dad.
Terms and conditions apply
Whether it’s $500 or $50,000, parents and adult children who are involved in home buying together need to get on the same page. Keehn says that it’s important for families to establish the financial support the homebuyers will receive — is it a gift with no strings attached, a loan that’s expected to be paid back, or a form of inheritance that would have otherwise been given following a death? Families should remember that gift money is not taxed in Canada. Golombek explains that in cases where adult children are receiving money from their parents for housing, with the exception of appreciated stocks where a capital gains tax would apply on the growth, there is “no negative tax consequences” for parents to gift down payment money.
Flushing the details out beforehand with a certified financial planner, Keehn says, helps determine the course of the financial support in the event of a big life change, such as a death or divorce. If the homebuyers split up, is the downpayment returned to the parents? If a parent dies, how will other siblings play a role if a mortgage was secretly secured for one of the adult children? To avoid any grief down the road, Keehn says these questions need to be answered.
“Some parents keep it confidential during the years that they’re alive, but it certainly creates a lot of heartache and resentment if there aren’t provisions made for other siblings at death,” she says.
Golombek says that if there are concerns about marriage breakdown or mismanagement from the kids, a zero-percent mortgage could be an option for parents.
“It’s not a gift, they actually make it a loan,” he says. “They go to a lawyer, and they secure the actual property in return for the mortgage — they don’t make any interest payment required.”
Think of retirement — both of your retirements
With the Bank of Mom and Dad’s cheque book open, home buyers might be tempted to splurge. But Golombek warns that even if your parents are helping to foot the bill, it’s important to avoid overpaying and becoming house poor.
“Even with parental help, kids can overstretch themselves,” he says. “They figure, ‘Oh we’re getting an extra $50,000 or $100,000 towards the house, we’ll just buy a bigger house!’ rather than saying, ‘Let’s just buy the house that we could have afforded, reduce our mortgage payments and save some money for retirement.’”
Parents have many reasons why they will choose to become financially involved in their child’s first real estate purchase: it’s a cultural expectation, they have free capital to spare, or because they feel it’s their responsibility as a parents do so. However, parents should be cautious about jeopardizing their own financial future for the sake of their kids. A recent RBC poll found that 96 percent of parents with adult children between the ages of 18 and 35 have provided financial support in some capacity, but a third of parents are worried about the impact this support is having on their retirement savings. Thirty-three percent of the surveyed parents said they might have to push back their retirement plans entirely.
Before any home buying money is given, Golombek recommends speaking with a certified financial advisor and make sure that the mortgage that is purchased is affordable for everyone. Keehn says this is an important step where cultural factors, the source of the financial support and geographic market conditions can be weighed into the financial plan. Getting the bigger picture on the expenses of homeownership and setting a budget, Keehn explains, can prevent adult children coming back for more money if they’re trapped in an expensive mortgage,
“Some parents are very eager to help their child to get into a home, but are they really setting them up for failure? That’s why that budget is so important,” says Keehn. “If they can’t afford to make mortgage payments, they can’t afford to pay the insurance, upkeep and everything else that surrounds homeownership …. are they setting them up for failure or to keep coming back for more money?”
It’s not personal, just business
When it was back-to-school shopping time and you were picking out a new backpack or a pair of sneakers, you’re parents probably had some control over what you got. Why? Because they were paying for it.
How much parental involvement is at hand when families are buying homes together is entirely individual, but it should be determined as to how much control parents can exercise. Golombek says that independence should be fostered within the adult children. One way to achieve this is to set limitations on the financial support, so parents can have a say on how much they’re spending while still giving most of the decision making power to the homebuyers.
“Parents in some cases could put conditions and say, ‘Look, we’ll support you with this amount, 10 percent, 20 percent of the home, up to our budget. So you should be shopping for homes in this [price] range. We will not support you if you go above this range,’” says Golombek.
While some parents will gift money with no exemptions, and others will insist on being on the property title, Keehn says that in all cases, keeping the lines of communication open in a professional manner is key.
“Certainly, this should be kind of more of a business contract, and a business conversation,” she says. “I think it’s well within the rights of the parents to be asking for the budget of the adult child.”
Build your network
Buying a home comes with its fair share of professionals to help you along the way: realtors, lawyers, advisors and inspectors. If you’re just starting out, you might not know any of these people besides who your parents have used, but Keehn says that this is a great opportunity for home buyers to find professionals tailored to their needs.
“These are teachable moments,” she says. “Regardless if you go through with it or not, this is a great exercise to help your adult child get those professionals in their life and to start to build relationships with people that make sense for them.”
If you haven’t found your own lawyer or planner yet, it might be the time. Golombek says that having professionals work for the parents and the adult children separately is a good way to assess individual needs and factors of income and goals.
“It’s important that both sets of people speak to their financial advisor to make sure that the mortgage that they’re taking on or home that they’re buying is affordable based on their cash flow and based on their budgeting and retirement planning,” he says.
If you’re having trouble assessing who is right for you, Keehn says to think of the process as similar to picking a doctor: find someone who is a similar age and might be experiencing the same issues as you are.
“It’s not a hard-and-fast rule, but a lot of people will say, ‘Get a doctor that’s near your age, that’s also equally going through the same things you are. They’re going through the same health issues you are,” says Keehn. “Often times that can be a great way for someone getting their finances in order, to have professionals that are also dealing with the same things they are.”