This article was reviewed by Chris Singer, CFP®.
Entering the housing market has always been a daunting task, but it is undoubtedly more challenging for today’s generation. With stricter mortgage qualifications, rising housing prices, and fluctuating mortgage rates, you might be wondering how your kids will ever break into the market. Which, in turn, will have you wondering whether or not you’re in a position to help and what that help could look like. If this sounds like you, keep reading. We’re going to cover the strategies and considerations you can employ to help your kids enter the housing market while protecting your financial well-being.
Assessing the Feasibility of Assistance
You need to put yourself first, which for many parents, feels counterintuitive or backward. But, in order to support your family and maintain financial stability, you need to be in the right position. Think of it like the oxygen mask analogy. When you’re waiting for your flight to take off and the flight attendants are walking you through the safety briefing—the one you receive
no matter where you are in the world—the message is the same: In case of an emergency, prioritize your safety by securing your own oxygen mask first before assisting others around you.
So, is your oxygen mask on securely? If it is, let’s go over the best ways to help your children become homeowners.
Don’t:
- Draw money from your retirement account.
- Borrow against your residence.
- Compromise the ability to make your own payments.
- Go into debt.
Ways to Help Your Children Buy a Home
- Down Payment Assistance (Financial gift, loan, investment)
- Joint Ownership (Tenants in common)
Qualifying for a Mortgage
Before we dive into the different ways you can help your children buy a home, we need to talk about qualifying for a mortgage. So many first-time home buyers are fixated on saving or sourcing the money they need to get a downpayment together, that they completely overlook qualifying for a mortgage.
A few years ago, the rate you qualify on changed, and now, an income of roughly 100K qualifies for a mortgage of 400K. Which, given today’s home prices, comes as quite of a shock. Most people think they’re going to qualify for a lot more, and it’s important to go into this with open eyes and manage expectations.
Down Payment Assistance
It’s true—for a first-time home buyer, the minimum down payment is 5%. But, even if your kids can get the 5% together, that does not mean they can qualify for the size of the mortgage needed. So they need a larger down payment, and that’s where you can step in.
If you’re in a position to increase the down payment size, you have several options:
Financial gift
You can give your children a financial gift, it is not taxed and possibly requires a mortgage gift letter confirming that the money is a gift and there will be no repayment. You should always check with the mortgage broker or lender for the current regulations, as they can vary.
One consideration with a financial gift, is that in the case of divorce or separation, the money will be considered a family asset.
Loan
If gifting is not an option for you and you still want to help your child, a loan might be a good option. However, you need to set and agree on clear terms for repayment.
Loaning your children money for their down payment isn’t a simple “I owe you.” The loan does not fall under their own down payment, so there is the possibility of paying a surcharge from the Canada Mortgage and Housing Corporation. Additionally, if you collect interest on the loan, you’ll need to declare it on your tax return.
This type of loan can be structured to protect against marital breakdown.
Investment
If your aim is to invest in real estate, this presents an opportunity to assist your children on their journey to property ownership while also deriving profit from your investment.
You can offer a loan with no immediate repayment requirement, with repayment only necessary once the property changes hands. The possibilities for structuring such an agreement are diverse. However, given that this is an investment endeavour, it’s crucial to incorporate the potential returns you anticipate.
It’s also worth contemplating whether, in the event of a loss on the property, both parties would share the investment’s decline proportionately.
Co-Signing
Rather than helping your children financially, you can take responsibility for the loan by co-signing. In order to co-sign, you will need to be approved by the lender or mortgage broker, and your name will be on the property’s title. You will be considered part-owner of the home, even if you contribute nothing financially to the purchase of the home.
By co-signing, your child will be able to get a larger mortgage than they can qualify for on their own. Be sure that your child can make the mortgage payments because if they default, you are responsible for the loan, and it will affect your credit rating and your entire financial well-being.
If, after a period of time, you want to be removed from the title, there’s a possibility that the borrower could free you from the loan using a document known as a co-signer release. It’s important to note that this can exclusively occur upon the primary borrower’s petition, and subsequent approval from the lender is required.
Joint Ownership
An alternative to downpayment assistance and co-signing is joint ownership or home sharing. While not as common in North America, the current market is making many families consider co-ownership as a viable option to fulfilling their goals of home ownership.
The concept of Tenants in Common enables individuals to collaboratively partake in a mortgage, with each holding a share—potentially of varying proportions, determined by their financial input as stipulated in a legal contract. You can decide how this looks for you: factors to consider are what percentage everyone contributes to the down payment and mortgage payments and what the living arrangements will be.
Co-owning a home has multiple benefits for all parties involved (such as a bigger property), but there are some considerations that need to be weighed before entering into joint ownership. It is important to make a formal agreement stating how you will manage costs and other home expenses like insurance and maintenance on the home. Another consideration is Joint Right of Survivorship. When you co-own a home, if someone passes away, the assets flow to the surviving owners. Another challenge is liability; essentially, if one owner is sued or commits an offence like drunk driving, all owners can find themselves liable or caught up in an unexpected lawsuit.
Do What’s Best for Your Financial Stability
The path to helping your children realize their dreams of homeownership is multifaceted and requires a thoughtful, well-informed approach. The challenges of today’s housing market require a balance between your desire to provide assistance and the need to secure your financial future.
As you consider various strategies such as down payment assistance, co-signing, or joint ownership, remember that clear communication and meticulous planning are paramount. Openly discussing expectations, responsibilities, and potential risks with your children will help forge a stronger foundation for your collective journey into the real estate realm—and prevent family disputes.
However you choose to help your children enter the housing market, we hope you have the information you need to make informed decisions that align with your family’s aspirations and financial stability. If you have any questions or want more information about any of these options, you can book a call with us!