Around 20% of first time home buyers received assistance from their parents in one form or another. Let’s look at the trends driving it, the ways parents are providing this assistance and the pros and cons of the various approaches involved.
Why More Parents Are Helping Their Children Buy Houses
“Get out of my house!” Parents may feel like screaming this at their adult children, but it isn’t because they’re all unemployed outs (perhaps 5% of Millennials are unemployed). It is in large part due to Canada’s insane housing market, the same one that led the government to apply new stress test rules, mortgage insurance requirements and loan to value ratios on all new mortgages in an effort to cool it off. This is why around a third of all Millennials (young adults 20-35) live at home, roughly 10% more than were living at home just a decade ago. Ironically, this is keeping the housing market overpriced, since many parents who’d like to downsize to a smaller property or condo are reluctant to sell the home with three or more adults still living there. This constraints supply though it may allow the Millennial to live more cheaply than if renting an apartment singly or with roommates.
How Parents Are Helping Their Children Buy Homes
The solution for many parents is to give them financial assistance in buying a home. A gift of a few thousand dollars toward a down payment may be enough to help them move into their own place. It is certainly a more tangible gift than money toward a destination wedding or furniture they don’t have a home for yet. Money toward closing costs could let them buy the house sooner and lock in today’s home prices. Money toward the down payment could reduce the amount of debt the young adult takes on, letting them build equity and become debt free sooner. A cash gift toward a home purchase could be seen as a living inheritance, reducing the parents’ taxable estate before they die while helping the next generation get established.
Adult children need to disclose the financial gift because failure to do so will mean the affordability calculations are a lie. Buying more house than you can afford is guaranteed to keep you poor as you struggle to pay both the mortgage and associated bills. Now that gift becomes costly since you can’t save up an emergency fund to pay for unexpected repairs without going into credit card debt. And you risk losing your home if your expenses rise unexpectedly due to the arrival of a new addition or the hours at work get cut. In these cases, it is better to get a cheaper starter home than stretch to buy a larger home you think you can afford thanks to parental generosity.
Another tactic is for parents to co-sign the loan. Borrowers love this since it gives them a financial backstop for the loan; if Junior doesn’t pay, Mom and Dad will pay. The upside for the adult children is typically a lower interest rate, though they may find something just as good without a cosigner if they worked with a Grande Prairie Mortgage Broker. The potential benefit for parents is no money out of pocket, unlike a cash gift, though they risk having to pay the payments if their child fails to make the payments. However, parents risk serious problems if neither they nor their children can pay the mortgage.
A potential benefit for adult children is a more realistic financial evaluation by banks; they don’t lend you more than you can afford because the cosigner is proof you can’t afford that extra 500 square feet of living space.
A few parents are buying homes in the hope that their children can inherit it. They typically rent out the property until their adult child can take over the property and the mortgage. This tactic comes with the hassles of being a landlord, more legal and tax implications than many are willing to admit, and the risk your children will feel obligated to live somewhere that isn’t right for them. Conversely, parents risk the same issue – barring the landlord aspect – if they decide to gift or sell the family home to adult children. The tax bill and legal issues are even greater if you decide to sell or gift a rental property to your adult children, whether or not they’ve been living there for a while.
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