Affordability, unaffordability, debt, mortgage, deposit, stress test, resale, new — these are words that are used every single day in the housing market. As the population continues to grow and as migration into the city continues, supply dwindles and prices continue to escalate. Land restrictions due to concerns with urban sprawl, land costs, government-imposed taxes and fees all contribute to the cost of housing. So, what is the next generation to do?
Many kids are turning to their parents, or parents are proactively trying to help their kids get into the housing market — and NOW! I have staff seeking counsel on how they can help their own kids and what options are available for investments today that they can gift to their kids in the future to help them get into the housing market.
Helping kids today to buy their first home is just another one of the long list of responsibilities parents are bearing. Escalating costs are certainly contributing to the need for financial assistance from parents, but there are other considerations.
Debt loads
Kids are staying in school longer to get the education to effectively compete in the job market, and with post-secondary education costs steadily rising, their savings are quickly depleted. Many graduates are strapped with student debt that makes saving for a down payment on a home next to impossible.
Statistics from Ratehub show that more and more parents are stepping up to help their kids enter the real estate market. In British Columbia, 42 per cent of parents help with financing, while in Ontario 35 per cent are actively involved with financing a home purchase.
Much of the financial support from parents is going towards the down payment as those who don’t have a sufficient down payment of at least 20 per cent are required to pay mortgage default insurance premiums, which add to the monthly costs.
What are the options?
When asking your parents for help (or advice) in purchasing a home, there are financial implications you both need to be aware of depending on whether parental assistance will be a loan, gift or co-sign.
A loan: This could be used to help top up the deposit, meet closing costs or even to help pay down other debt so that a child can focus on the necessary home deposit.
Parents should seek advice from their accountant as lenders will want to know about all outstanding debt (for both lender and borrower) and the parent will have to declare interest from such a loan on their tax return.
A gift: A parent may also extend financial assistance as a gift. One of the easiest ways to help a child get into the housing market is by giving them a financial gift.
There’s no tax on cash gifts. However, if the parents’ gift is buying the house for a child to live in (i.e. the home is in the parents’ name), then the parents, as owners, may have to pay income tax on any capital gains when the house is eventually transferred to the child or sold.
A co-sign: Finally, many parents elect to co-sign for their child’s purchase/mortgage. The key risk in co-signing evolves around the child’s ability to pay the mortgage. If there is a default on their mortgage payments, the co-signees (yes, Mom and Dad) would be on the hook for the entire outstanding balance.
If you’re a parent wanting to help your kids buy their first home, or if you’re a kid asking your parents for help, make sure you get the appropriate financial and tax advice. Discuss the details and financial arrangements and understand the desired outcome.
As parents, we are here to help, but we all need to be aware of what the options entail.
Related
