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In the long list of parental responsibilities, helping kids buy their first home is making its way to the top. Competitive housing markets are surely contributing to the need for financial assistance, but there are other factors. Compared to previous generations, kids have to stay in school longer to effectively compete in the job market while the cost of post-secondary education steadily rises. Many university graduates are strapped with student loans that make saving for a home difficult, too.
In varying degrees, parents across Canada are helping kids enter the real estate market. In British Columbia and Ontario, the provinces with the hottest housing markets, 42 per cent and 35 per cent of these home buyers, respectively, received financial help from family, according to research from Ratehub. The Atlantic provinces had the lowest rate of assistance at 18 per cent.
Much of the money parents contribute is going toward the down payment, but how much people put down varies from province to province. In British Columbia and Québec, 45 per cent of home buyers put down at least 20 per cent. In Ontario it’s 38 per cent, while only 20 per cent of people in Manitoba and Saskatchewan meet the 20 per cent marker. Those who don’t put down at least 20 per cent are required to pay mortgage default insurance premiums. The amount you pay for this insurance declines as your down payment increases.
Parents helping kids buy a house can make sense, but parents do need to consider the financial implications of helping, especially when it comes to three main financial assistance options.
Loan: This can be a good way to top up a down payment after the minimum is met or it could be used to cover closing costs. But take note: commercial lenders will ask about all outstanding debts, and parents will have to declare interest from the loan on their tax return.
Co-sign: Many parents co-sign a mortgage, and while that can get children their own abode it comes with risks, too. If the kids default on their mortgage payments, the co-signees would be on the hook for the entire outstanding balance.
Gift: One of the easiest ways to help a child is to give them a financial gift. There’s no tax on cash gifts, but if the parents purchase a house for the child to live in, then the parents, as owners, may have to pay income tax on any capital gain when the house is eventually sold.
If you’re a parent wanting to help your kids buy their first home, make sure you do that without putting your own financial life in jeopardy by seeking advice from your professional advisor.
Jeff Somers, BA, RRC, CFP, works at Investors Group in Charlottetown. This column is written and published by IG Wealth Management as a general source of information only. It is not intended as a solicitation to buy or sell specific investments or to provide tax, legal or investment advice. Contact your own adviser for specific advice about your circumstances.