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Helping your child buy a home: What you need to know

Thinking about helping your child buy a home?

If so, it’s understandable. The Ottawa housing market continues to achieve new heights month over month without showing much sign of slowing down. According to the Ottawa Real Estate Board, the average residential house price in May was $741,206, up 35 per cent from the same time last year.

As housing prices continue to climb, it is making it more difficult for first-time home buyers to enter the market. Due to this, more parents are starting to help their children come up with a down payment to make their dream of owning a home a reality. If you’re thinking about helping your children out with this, here are a few things you should consider before moving forward.

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Providing a loan versus giving a gift

Before transferring the funds, it is important that you sit down with your child to discuss the details and expectations.

If you will be providing a loan, it is critical to have supporting documentation such as a promissory note, loan agreement or registered mortgage on the title of your child’s house. If you intend to give the money as a gift when helping your child buy a home, it means you do not expect to be repaid.

It’s important to review your financial plan to look at a gift scenario and ensure there is no chance you will ever need this money to support your retirement or future goals. We can help you by testing your financial plan and guiding you through these types of decisions.

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If your child’s home purchase is being financed by a financial institution, they will need to show the money has been in the bank account for a minimum of 90 days before home purchase. Otherwise, you will need to sign a gift letter, which the financial institution will provide. The gift letter is a legally binding document evidencing proof that the money from parents is a gift, not a loan.

Either way, we suggest you seek legal advice to build and execute a proper strategy that protects all parties when you are helping your child buy a home.

Addressing estate inequalities when helping your child buy a home

If you have multiple children, gifting money to one child and not the others or gifting different amounts can cause inequalities. If you wish to reconcile these inequalities, you can add a “hotchpot clause” into your will.

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A hotchpot clause considers gifts, loans or advancements to children during a parents’ lifetime in the value and division of the estate and is used to calculate how the estate is divided amongst the children and then subtracts the advances from each child’s portion when you pass.

In some cases where children have received larger loans, the hotchpot clause can be used to offset debt up to a specified amount if the value of each child’s share from the estate would be less than the loan received.

MORE: What you need to know about bequeathing property

Protecting your assets in case of a marriage breakdown

If you intend to help your child and their partner purchase their matrimonial home, here are a few things that should be considered.

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Even though people enter a marriage with the hope that their love and partnership will last a lifetime, this is not always the case. It is crucial to plan for the worst and hope for the best. This will make it a lot easier than doing it in the moment with emotions involved.

If your child’s marriage does break down or if your child or child’s spouse is exposed to creditor issues, this can call into question the intentions of the funds you provided them. Were the funds for helping your child buy a home a gift or a loan? To mitigate this risk, timing and intentions are extremely important as it can affect who owns the property upon marital breakdown.

Under Ontario’s Family Law Act, gifts from a third party during marriage are excluded from net family property and aren’t subject to equalization. Further, gifts received prior to marriage are a deduction only and post-marriage income and gains are shared unless a domestic contract provides otherwise.

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A matrimonial home has special treatment and its value is not deductible if owned at the date of marriage and marriage breakdown. In the case of a matrimonial home, it may be preferable to make a loan to a child rather than a gift. That is because under Ontario family law, the loan reduces the net value of family property upon marital breakdown, meaning it is not included in the calculation for equalization payments and your child would not have to share the value with the ex-spouse.

A marriage contract or domestic contract (also known as a prenuptial agreement) is a useful document to create before a union. These contracts can protect you, your child and your family’s wealth, but aren’t widely used because they can be awkward for families to discuss. Here is a great resource to help you initiate the conversation with your child on creating a prenuptial agreement.

First-time home buyer incentives

As long as your child is purchasing their first home they can qualify for the federal government’s Home Buyer’s Plan, where they can use up to $35,000 of their RRSP savings ($70,000 for a couple) to help finance their down payment.

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For the funds to qualify, the money being pulled from the RRSP must be deposited at least 90 days prior to the house’s closing date. Learn more about the program and see if it is right for your situation.

About the Author

Jenna Roundell

Jenna Roundell is an Associate Advisor with RBC Dominion Securities and a Certified Financial Planner as well as a Chartered Investment Manager. Her insights into the real property side of financial planning come from working with clients and her own recent experience building a custom home. You can reach her via LinkedIn or at jenna.roundell@rbc.com.

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