Helping Your Kids Buy a Home

Unlock the door for the next generation of home ownership

Your help could make all the difference in how quickly your kids get a foothold in our high-priced real estate market. But unless you make the right choices, those good intentions can turn into family conflict, tax headaches and legal battles – you might even harm your own finances.

What to assess before stepping up

Your heart may tell you giving your kids a hand to enter the real estate market is the right thing to do. But is it a smart decision – for you and them? Here are a few things to consider before you step up.

First look at your own circumstances. It's important that whatever help you extend doesn't risk your own financial security. If you're thinking of selling investments or going as far as downsizing your home to free up capital, make sure you can live without those funds you're about to give away. Review your plans with your advisor to be confident your act of kindness won't negatively impact your finances today or your retirement tomorrow.

Next, assess your child's desire and readiness to become a homeowner. While they may be eager for a place of their own, it doesn’t mean they’re ready to take on home ownership. Will they be able to handle the costs, not only today, but in the future? In addition to mortgage payments, there will be bills for things like utilities, property taxes, home maintenance and insurance. Can they set aside enough money to deal with inevitable emergencies? Avoid leading your kids into a situation where they’ll be spread too thin financially.

Make sure you fully understand what the consequences of offering financial help could be for your estate plan. Choosing to use your wealth to help one child can strain your relationships with other family members. It’s important to clarify your intentions. For example, does your gift count against that child’s inheritance? Do you expect any loan to be forgiven upon your death? Communicating with your loved ones and heirs will go a long way towards eliminating misunderstandings.

Strategies to help with home ownership

If you conclude your pocketbook can handle the expense of helping out and your child's ready to take on home ownership, you have several options.

1. Make a cash gift

The most straightforward method of helping a child buy a home is to simply give them the money to cover some or all of the purchase, or chip in for the property's carrying costs. If you give enough so that your child can put up at least 20% of the purchase price, they may avoid CMHC mortgage insurance fees^***.

You should be aware, however, that there are some tax considerations to keep in mind if you choose this approach.

The good news is because the gift is being made to an adult child, income attribution rules don't apply, so there are no tax consequences to the cash transfer itself. A gift now, instead of later through your will, has the added benefit of avoiding probate fees. However, if you have to liquidate investments to raise the money you might incur taxable capital gains (or losses) in the process.

The key is to ensure the home is in their name so that, as a principal residence, it won’t trigger capital gains taxes when they sell. If the property is in your name, it would be considered a secondary residence and you'd get hit with the capital gains.

2. Loan the money

Some argue that avoiding a handout and offering a loan instead is a better way to give a child a hand up in buying a home.

A unique benefit of a loan is that it can be educational as a child faces the discipline of making regular mortgage payments to you. You can set the loan's interest rate so you both benefit: lower than what a traditional lender would demand, but higher than what your funds might otherwise earn in a savings account. Unless you choose to lend the money free of charge, any loan interest must be declared as income in your hands.

Some parents like the commitment that having a loan requires, but still want to maximize the assistance they offer their children. One approach that can let you do both is to quietly set aside your child's loan payments in a separate account. Those funds can then build into a nest egg you can give at a later date for a special purpose like buying furniture, taking a trip or investing in a TFSA.

3.  Encourage them to set up an FHSA (and help with a contribution)

Introduced to help younger generations and non-home owners get into the market, the First Home Savings Account (FHSA) is a great way to save for a first home – you should encourage your loved ones to explore this option. Similar to an RRSP, FHSA contributions can be deducted from the year’s earned income. The FHSA allows account holders to contribute up to $8,000 a year (to a lifetime maximum of $40,000) and carry forward up to $8,000 of room to the next year. Funds held in an FHSA grow tax-free and can be withdraw without claiming them as income so long as it is done so to purchase a qualifying home.

If you’re looking to gift or loan the money as in the steps above, you should also look into some of the FHSA’s tax benefits. While tax and savings benefits are credited towards the recipient of the gift, the FHSA offers a sound and tax-efficient way to save for a first home. Explore more about this option and the benefits with a financial advisor.

4. Co-sign the loan

Having enough income to qualify for a mortgage is a significant challenge for many young adults. For years, rising home prices have far outpaced wage growth. Agreeing to co-sign for your child's mortgage can strengthen their application and help them get approved. But while the benefit of co-signing may be obvious, the risks sometimes aren't.

Once you co-sign you are on title to the property and share legal responsibility if anything goes wrong. Because you're an owner, you're fully liable for the mortgage debt if your child defaults, possibly putting your own credit rating at risk. Also, weigh the fact that co-signing can crimp your own ability to borrow in the future.

Keep in mind that co-signing may limit a child's mortgage choices. If they apply on their own, your child could be eligible for a high-ratio mortgage with as little as 5% down. However, if you co-sign and already have a mortgage, your child is restricted to qualifying for a conventional mortgage, requiring a minimum 20% down payment.

5. Buy a property and rent it to them

Buying a home and then renting it out to your child, perhaps with an eye to selling or gifting it to them later, is an alternative to owning immediately. While this strategy takes the responsibility of managing a home away from them, it changes the picture significantly for you.

You essentially become an investor, with the upside potential but also the headaches and downside risk of owning rental property. Be aware that this living arrangement won't help your child build their credit rating.

As a landlord you'll have to claim your child's rental payments as income, but can deduct any borrowing charges and qualifying expenses of maintaining the home. Plus there may be tax implications when you do eventually sell or gift the property.

6. You "trust" them

Setting up a discretionary family trust may be a viable option to help your child purchase a property. Since you're the trustee, you'll retain legal control. Your child would have to list the home as a principal residence during the years the trust owns it. This option is more complex and there are significant setup costs, but it does provide some options on designating proceeds when it comes time to sell.

7. Co-ownership

And lastly, a growing trend is co-ownership. For example, you can turn your house into a duplex so your child can live in one portion while you live in the other. Or you can buy a new place that accommodates both parties. If this is the option you choose, there are lots of questions that would need to be sorted out in advance, and an agreement is critical.

Weighing the options

There is no one right answer on how to help a child buy a home. What's clear is it's a decision that shouldn't be taken lightly, on your part or theirs.

While we've outlined a few of the ways you can assist, any strategy comes with a myriad of financial and legal considerations.

No matter your choice, the keys are to avoid putting your own financial security at risk and add the proper safeguards to protect all the parties involved. Above all, get professional guidance. Be sure to talk to your BlueShore Financial advisor and legal counsel before you take the plunge.