As parents, the first instinct is to help your child when they need something. Now, it’s time for them to leave the nest. However, there is a growing issue. In Canada, it’s becoming more and more difficult for millennials to buy a house. At this point, it is almost impossible for younger generations to buy a house. As of recent statistics, only 33% of millennials are home owners and roughly 56% of millennials have buying a home as their top priority.
Parents financially helping their child buy a house is a quickly rising occurrence now. In 2019, 37% of homebuyers in Canada received a gift or loan from a family member or friend – which is a rather large increase from 2015 at 31%. There are many factors and risks to consider though when assisting your child with a down payment. Parental instincts aside, your finances are important and there can be risks involved with helping your kids with such a large decision. Take the following into consideration first:
- Can you afford to help your kid?
- Think about your financial future first – there can be a lot at stake here depending on which route you take. Do not jeopardize your own finances for your children. Your money is yours first.
- Can your child keep up their end of the bargain? Are you positive that if you choose to lend your child money, they would be OK with paying it back on time?
Once you’ve carefully reviewed what’s at stake and that you’re financially capable of helping your child out, there are a few different ways you can help your child with the down payment.
Gifting Money
Gifting money is when you give someone a lump sum of money without the intention that money being paid back – no strings attached. Fairly simple, right? Well, there’s a little more than just handing over the money. When gifting money, there is usually an official declaration that would need to be signed, confirming that the money given is not intended to be paid back. When you gift money as well, it isn’t taxed in Canada.
Another way of gifting money is also seeing it as a “living inheritance”. The perk of doing this is instead of money that you intended on being passed down as part of your will, you can instead gift to your child, so they can use that money when they are young to help put a down payment on their house. Before moving forward with a living inheritance, it’s important to evaluate any legal repercussions or how it may affect your will.
Loaning Money
If you can’t or would rather not gift your child money, loans also make a great option. That way, you’ll be getting the money back and your child will (most likely) pay less of an interest fee paying you back rather than what their mortgage rate would be. So, it’s a win-win. However, it’s extremely important to review your financial expectations with your child. You’ll need to discuss with them how much you’ll be loaning, what the interest rate will be and how and when repayment will take place.
It’s also important to review with a mortgage broker or financial advisor on how the loan will affect the down payment. In some cases, a loan is not considered a down payment from your child. What this means is that your child might possibly pay a surcharge from the Canada Mortgage and Housing Corporation – so if you choose to take this route, review it carefully.
The biggest thing to remember is that there is a lot of trust involved with loaning or gifting your child money towards a home. It is a large financial decision that needs to be looked at cautiously and without the impairment of following that loving parental instinct of wanting to help your child in their time of need. With our expert legal advice at Ares Law, we can equip you with all the information you need and help you land on an option that works best for you and your family. We are specialists on wills and estate planning and want your child to find their forever home without breaking your bank. Connect with us today at our Parry Sound office, (705) 746-6444.
