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.
