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But parents should look at big financial picture first
By Linda White, special to PostMedia Network
For the past few years, many first-time homebuyers struggling to come up with a down payment have been banking on mom and dad to lend a financial hand, but parents should look at the big financial picture before cracking open their piggy banks.
“It’s not unusual, especially on a first house purchase, for us to see parents helping their children come up with a down payment through the ‘bank of mom and dad’ or even going on title,” says Jason Davenport of Meridian Credit Union.
According to a report released by BMO in April, nearly half of first-time homebuyers across the country see the housing market as affordable but require assistance to get their foot in door . More than one quarter are looking for a financial gift between $5,000 and $50,000 , the report found, but more than 10% are looking for a financial gift of $100,000 or more.
First-time buyers in Atlantic Canada expect to pay the lowest average price at $326,700 , while buyers in Ontario and B.C. planning to fork out $443,700 and $445,300 respectively, says the BMO report. A recent report on Millennials and the Markets by the Ontario Securities Commission, meanwhile, found only 33% of millennials are homeowners but 56% of non-homeowning millennials say owning a house is a top financial priority.
Many parents are stepping in to help them realize that dream. According to a Genworth Canada First-Time Homeownership Study completed in collaboration with Royal LePage, 37% of buyers received financial gifts and loans from family members – up from 31% in 2015. Plus, half who received a gift or loan would have delayed buying a house without it.
The most straightforward way to help is to gift the money to your child, though that carries the inherent risk of what happens to the value of your gift if your child is married and one day separates from their spouse. “If they dissolve their relationship, 50% of the funds you gave would (go to their spouse) if you haven’t taken steps already to safeguard against that,” says Davenport.
Another option is to co-sign or guarantee their mortgage. But in doing that, you’re assuming responsibility if your child can’t pay their mortgage, which could potentially put your financial future at stake. Instead of gifting the money, you could structure it as a loan to protect your assets. You can choose to forgive the loan in the future, perhaps as part of your estate planning.
Parents should look at the big picture before making a financial investment of this magnitude for their children. “Does it mean you will have to push your retirement out? Do you need to be more aggressive with your investments?” Davenport asks. If you’re planning to refinance your home, will you be faced with a larger mortgage payment and how would that impact your day-to-day budget?
If you’re selling an investment that has risen significantly, you could face a hefty tax bill if you don’t have other losses to offset the gains at tax time. If you borrow the money, you’ll be charged interest and need a plan to pay it back. You also need to seriously consider your own needs for any money and other savings you’re thinking of sharing, which might include long-term care down the road.
Of course, mortgage payments are only part of the total cost of homeownership. Are you confident your kids can keep their end of the bargain, such as property taxes, utilities, insurance, condo fees, maintenance costs and emergency repairs?
“If you’re now forced to pay for those things and it’s for not a good reason, that’s going to have a really negative effect on your relationship, especially if it’s now impacting your life on a day-to-day basis and stopping you from doing the things you want to do in your retirement,” says Davenport.
But it’s not all doom and gloom, especially if you’re concerned about the impact taxation will one day have on your estate. Passing on a living inheritance to your kids means they’ll have less to pay in estate tax and probate fees when you die. (Canada has no gift tax so cash given to children, grandchildren or anyone else while you’re alive won’t be taxed.)
While you still have some control over where your money goes, gifting a portion of it towards the purchase of an appreciating asset for your children is sensible. “You can also enjoy watching them enjoy the fruits of your labour,” says Davenport.
Copyright Postmedia Network Inc., 2019