22 Mar Why You Want to Help Your Kids with a Mortgage
Today’s real estate market isn’t what it was thirty, twenty or even ten years ago. Prices are still skyrocketing with no end in sight. Some cynics have been predicting a housing crash for years now, but in reality, we haven’t even seen a slowdown in sales or appreciation in the Toronto area.
For those ready to enter the housing market for the first time, today’s prices are quite daunting. Even young professionals are having a hard time building up the necessary down payment, forcing them to rent for much longer than they want to.As parents, what can we do to help? Are there benefits to helping our kids enter today’s housing market? I think that yes, there are times when helping our kids with their first mortgage make sense.
Focus on the Down Payment
When it comes to helping our kids with their first home, I think focusing on the down payment is the way to go. It’s a practice that’s getting to be more popular. According to this CBC News article, more first-time homebuyers are relying on help from their parents for their down payments.
Many of us plan to leave an inheritance to our children. But in reality, our kids would benefit more from the gift when they are in their twenties or thirties, instead of when they are in their fifties plus, when they are already well established.
Gifting money to your child for a down payment is allowed by lenders as well as bythe Canadian Mortgage and Housing Corporation (CMHC). You may need to write a letter stating that the money is indeed a gift and not a loan, but the process is quite straightforward. The best part? Gifted money is not taxable, which means your child won’t need to pay taxes on the sum. If that money is instead given to your child as part of an inheritance, estate taxes and other fees may apply.
But how much money are we talking about? In Toronto, a $20,000 down payment may be more than enough for a condo purchase (if putting down the minimum 5 per cent). More money can mean a higher priced home, a higher percentage down on the home or both.
Don’t Want to Gift Money? Loan it Instead.
If giving your child money for a down payment isn’t something you want to do, you might want to consider a personal loan instead. Many parents who choose to loan money to their kids like that they can set their own terms, such as no repayments for the first few years, or making it an interest-free loan. As a parent, you can choose to charge interest or not, just make sure the terms of the loan are clearly set out.
To protect yourself financially, it’s best to consult with a lawyer before loaning money to anyone, and to have the agreement in writing.
Helping with a Down Payment Can Create Self-Sufficiency
The last thing any parent wants is to see their child struggle and in need of monthly handouts. The benefit of helping your child with their down payment is that it is a one-time event, similar to helping with the cost of a wedding. You’re not setting yourself up to be responsible for their entire mortgage or for their monthly payments.
If your help allows your kids to put 20 per cent down, they won’t need to pay CMHC insurance fees, which can mean a savings in the thousands of dollars. They will also have a more manageable monthly mortgage payment, giving them the opportunity to get ahead financially.
There are many reasons why you may want to help your kids with a mortgage. When done right, it can give a hand up to your child, while still allowing you to be financially secure.
For more information on qualifying for a mortgage, check out my homepage found here. My team is also happy to answer any questions you may have; call us today forfree, no-obligation advice.