4 Steps To Help Your Adult Child Buy A House
Housing has always been expensive. But these days, getting your foot in the door in the Canadian real estate market is a more significant challenge than ever before. With prices increasing steadily for nearly 30 years, it’s unlikely that your adult children may be able to afford a down payment if they live in a major city or don’t have a high-earning career. For that reason, helping your adult child buy a home may feel like a consideration you need to take seriously.
Many people scoff at the fact that so many parents are helping their children financially. But what they fail to acknowledge is that homeownership is more than just an asset. It’s also a lifestyle that most of us need to grow our families, feel safe and secure and find permanence and stability in our daily lives. In fact, a Zolo study found that 77% of Canadians would put off saving for retirement if it meant they could buy a home sooner. For that reason, you may be leaning towards offering monetary support to help your adult child buy — but aren’t yet sure if you can or should.
After all, there are pros and cons to this sentiment, including the benefit of helping your child achieve more financial security but the potential downfall of creating a dependency on you for said financial security.
Not only does lending money have the potential to impact your relationship, but it can also come with severe consequences through co-signing or loaning to someone who may not be responsible. So, before you write a cheque, let’s walk through the steps you should take if you plan to help your child with their down payment or buy a home.
Step 1: Determine whether you are financially able
Like any significant purchase, you’ll need to complete a thorough review of your current financial situation. This is particularly important if you plan to support someone else with their money goals — such as buying a home.
The last thing you want to run into is a situation where you’re risking your retirement plans to support your children. So before making any major investments, be sure to speak to a financial planner to see how much you can give, if anything, for a down payment.
Three financial questions to ask yourself:
- Will this cause stress in my retirement plan?
- How will this impact a future inheritance?
- How will this affect my current budget or financial goals?
Step 2: Consider your options for ways to help
If you’ve concluded that your financial situation allows for supporting your child, there are various ways you can help them buy a home. So, the next step is to determine which of these options is the best fit for your family.
First, you can loan them money for their down payment. Keep in mind that loans can become complex if you don’t communicate a specific plan for repayment, including what the boundaries need to be for both parties to agree.
Some ground rules for personal loans include:
- Putting the agreement in writing
- Creating a payment plan that works for both parties
- Consider whether this is an interest-free loan or not
If loaning sounds too complex and like it may cause issues between you and your child, perhaps the better option is to gift them their down payment as an early inheritance. However, before doing this, be sure to speak with a mortgage professional to determine how much you can and should give, how this will impact their financial picture when lenders review their income, and the best process to complete this transaction.
Perhaps you’d like to help your child secure a mortgage by co-signing on a loan or by purchasing a home together. Although this can be highly beneficial for your child’s ability to gain mortgage approval, you must consider the ramifications if they deal with some financial difficulty or miss a mortgage payment. You will be equally responsible for the cost of the home, and the onus will be on you to ensure that the house is appropriately paid for.
Your last option is to buy them an entire home or sell your current residence for an affordable price. Regardless of the decision you make, a much larger conversation needs to occur between you and your child to ensure everyone is happy and on board with the plan you choose.
Step 3: Remember taxes — for both of you
Depending on how you choose to support your child’s home buying experience, it’s essential to consider the tax implications that you may face. For instance, say you take money out of your Registered Retirement Savings Plan (RRSP) to provide a gifted down payment to your child. Remember that you’ll be on the hook to pay taxes for this withdrawal but won’t receive the home-buying tax credit that your child will, given you are not the primary owner.
That’s why it would be wise to consider using your Tax Free Savings Account (TFSA), where you can withdraw funds tax-free, the withdrawal won’t impact your Old Age Security (OAS) benefits, and you’ll get the contribution room added back to your TFSA at the start of the next calendar year.
This is a great time to speak with your financial planner or accountant to ensure your bases are covered.
Step 4: Make the transaction happen — or don’t
The final step in this process is either lending, loaning or gifting the money to your child, or not. You are the final decision maker in this idea, and it’s vital that you feel confident that you have had a solid conversation with the following people:
- Your child
- Your financial planner
- A mortgage professional
- An accountant
Once you’ve done your due diligence, everything else will start to fall into place. Regardless of your choice, the final reminder I’ll leave you is that rather than listen to your heart and opt for the emotional responsibility you feel, try to practice logic first. Although it may feel like you’re helping your child, if said help negatively impacts you, it isn’t as productive as you may think.
Alyssa is an award-winning personal finance blogger and founder of MixedUpMoney.com. She writes about being a mom, overcoming personal debts, and how to get away with affording your ridiculously expensive latte habit. A new homeowner, Alyssa brings her real-life knowledge of the Canadian real estate market and smart money matters to the Zolo real estate brand.
Thanks, Alyssa, for writing about this topic. It’s something I’m hearing more and more about from my retired or soon-to-be retired clients.
I’m a big believer in putting on your own oxygen mask before assisting others – and so you need to make sure you can comfortably meet your own retirement spending needs before deciding to make a financial gift to your child(ren).
Of the clients I work with who want to do this for their adult children, the most common reason is to give an early inheritance to help their children out when they could use it most. So not leaving a million dollars at age 90 when their kids are 60-65, but gifting $50k or $100k or $200k to their children at a more strategic age when life is most challenging and expensive (late 20s, early 30s).
They’re not typically doing it for the sole reason that housing is expensive. In fact, the gift may be used to start a business, or to fill up unused room in their TFSAs, or to fund the grandkids’ RESPs.
What’s becoming less common is the notion that, “I paid my own way without any hand-outs, so why should I give my kids anything?” We have to recognize that the 2020s are a different time than the 1980s. Post-secondary is expensive, housing is expensive, it’s more difficult to land a permanent job with benefits, pensions are disappearing.
I’m all for giving my kids more opportunities to succeed in that environment, and doing it at strategic ages that are meaningful for my kids, rather than leaving them a pile of money when they’re 65.
A further and much larger consideration would be if the child has a spouse, or, starts a relationship a few years into the program. What will the economic help for the home purchase look like if the child’s relationship fails? The parent could potentially be paying for the child’s spouse to live in the house.
Plenty to consider besides the upfront cash.
My instinct would be to take back a second mortgage on the house for the amount of money that you’re putting in (presuming there will be a first mortgage to a bank). If it’s structured properly, it’s a family debt just like the house would be a family asset. If the marriage goes south, you can call in the mortgage loan and ensure the money circles back round to you rather than leaving the value with your child’s former spouse. Speak with a lawyer before setting this up and be prepared to have the mortgage look and act like a “real” mortgage – but you could set it up in a very generous way and then forgive the debt in your will upon your death.
Thanks for sharing this article.
As the parent of two adult children who are trying to make their own ways in this very challenging economic environment, I have always thought it was very important to do everything I could to help them succeed. Having lived through several job losses due to recessions and cutbacks, and having had to move across the country to get a decent paying job, my journey has not been easy either. No defined pensions here…
I have always wondered what life is like for those people where everything just goes to plan and things just fall effortlessly into place for their adult children.
Hi, nice article. What is the limit to gifting adult children a down payment? Will there be any income tax on them for the money received as a gift?
Thanks
There is no gift tax in Canada for your child to pay but YOU could be paying capital gains tax if you sold investments to raise the money fore your child or income tax tax if you took money out of an RRSP.
We thought long and hard before we secured a condo for our kids. At first we rented for our college/university kids and then found buying a condo was still cheaper in the long run. To avoid owner transfer costs we placed the condo in one of our kids names right away. I’d like to comment that we have a great relationship with our kids built on trust and level mindedness. This along with the fact that we want our kids to have a stress free financial start, something my wife and I didn’t have. We’re proud of our kids and know they will both be successful as they have proven time over time how responsible they are. We are fortunate to have them and extending a healthy hand to start them on their way makes sense both lovingly and financially.
Who knows what the future holds and having them wait for inheritance no long make sense, watching them enjoy it while we’re still alive is much more rewarding.
Totally agree. We have 4 kids. We bought rental properties a long time ago with the idea of putting each kid in a house. We just sold 2 to the eldest kids. They each got $150,000 off the price of the house and will repay the remainder over time. This $ (300,000) will be divided and go to the younger 2 kids so they can have a hefty down payment. Like you we are very proud of our kids, they work hard, save hard and are more than responsible. So happy we can help them out and set them up to have great, solid futures.
We didn’t have a lot of cash to give the kids, being mindful of our own retirements with no pension plans, but we did have another way to help out. They scraped together the bare minimum of a down payment and bought an absolute disaster of a condo in a great location with a great view.
We provided about 30K in cash and a TON of free labour, taking the walls down to the studs, repairing drywall, painting, installing new flooring, baseboards etc. The 30K paid for flooring, appliances, kitchen cabinets, paint and miscellaneous. Our son, an electrician, did all the wiring.
Now the condo is absolutely gorgeous, worth easily 150K more than they paid for it, and will generate a bigger down payment when they upsize in a few years.
These comments are great! As a parent of 3 (early to mid teens), with a solid retirement plan but little cash, I appreciate hearing the creative ways those of you helping your kids have been able to pull it off.
Great article. I always tell people cheering for real estate gains that they’re a double edged sword: as your asset (your home) grows, your liabilities (the amount of help your kids will need) grows as well.
Shows just how important it is for homeowners with a lot of equity to continue to contribute to their RRSP and TFSAs.
I may be completely incorrect on this however when Mom & Dad decide to go on title to help the kid out they need to consider the capital gains exemption on the primary residence. This wasn’t discussed in the article however I believe the CRA does not allow you to “double dip” so if Mom & Dad co-sign they (as long as they are on title) cannot claim the exception from that time forward, the child does. So if they stay on title for 10 years they have lost that exemption and that period of ownership becomes taxable upon sale of their residence.
They way I’ve always thought about is when we’re wealthy enough to afford it and our child is financially responsible as well as mature enough to take care of their own home then I see no problem with helping them make a down payment.