Parental Assistance: Helping Your Child Buy a Home

While home ownership remains a goal for many young Canadians, achieving it is no walk in the park. Soaring real estate prices have rendered it less a rite of passage and more a mountain to scale for many Millennials and Gen Zs. As a result, parents are stepping in to lend a helping hand with increased frequency.

According to a recent report by CIBC Capital Markets, “over the first nine months of 2021, first-time homebuyers in Vancouver received an average of $180,000. This figure increases even more for parents supporting their children buying larger homes, with the average for move-uppers at $340,000.”¹

If you’re able to help your child purchase a home, you’ll be giving them a real leg up but, before rushing in, it’s best to consider the financial and emotional implications of various arrangements. Only then will you be in a position to maximize the chances of a positive outcome for both you and your child. 

Loaning Your Child Money for a Down Payment (or the Whole Cost)

A loan from parent to child covering the amount of the down payment, or even the whole cost of the home, is a common arrangement. As a lender you’ll face less of an impact on your own finances than you would under a gifting scenario. You may choose to charge your child a lower interest fee than a lending institution would, meaning they benefit as well. 

Be aware that there are consequences for those who are forced to repay their down payment. If Canada Mortgage and Housing Corporation insurance is required, your child’s financial obligation to you will be noted and will result in a surcharge. 

Note, too, that you’ll be required to report any income earned in the form of interest when filing your tax return. 

Gifting Your Child Money for a Down Payment or Home

Those in a financial position to do so may opt to simply gift their children the money for a down payment or full purchase. 

Many first-time homebuyers are used to paying rent, so a monthly mortgage payment will not seem such a foreign concept. Coming up with a down payment may present a larger challenge. 

If you’re already planning to leave your children money in your will, doing it now will save them money on probate fees, while allowing you to experience the joy of helping out. In order to help your child avoid the aforementioned penalty associated with borrowing their down payment, you may be required to sign a declaration verifying that it’s truly a gift, as opposed to a ‘secret loan’. 

Another consideration, if you buy a house and later gift it to your child, the government will equate the situation to a fair market sale. If the value of the home appreciated during your possession, you’ll be taxed for capital gains. 

Co-signing Your Child’s Mortgage

Some parents opt to co-sign their child’s mortgage but, again, there are factors to consider. If you currently have a mortgage on your own home, your child will not qualify for a high ratio mortgage; as a result, a larger down payment will be required. 

With your name on the mortgage, you will not only risk damaged credit if payments are missed but will also be liable if something goes wrong at the house. 

The Importance of a Good Conversation

Helping your child buy a home can obviously be a rewarding experience, but it’s important to assess potential pitfalls and plan accordingly. You may feel a sense of ownership of the house, which can lead to a power struggle if your child makes decisions you don’t agree with. Other children could resent the assistance you’ve provided. In the event of your child going through a divorce, equity will need to be negotiated with their ex-spouse. These are emotional situations. 

Since it’s a family affair, there may be a tendency to gloss over the details of the financial arrangement. This is a mistake. In cases of loans, what are the exact terms? How involved do you expect to be in decisions regarding the house? What will be the consequences of missed payments?

Arrangements between people and financial institutions will, of course, always be defined down to the smallest detail. The difference is that financial institutions didn’t give birth to and raise their customers. While financial agreements between family members are inevitably more personal, that doesn’t mean that they should be entered into haphazardly. 

Home ownership is a wonderful milestone. By discussing your financial arrangement openly and in detail, you’ll set yourself, and your child, up for long-term success. 

Cited Sources

1Chan, Kenneth. “Urbanized.” Parents gifting Vancouver homebuyers $340,000 on average for down payment. Daily Hive, October 25, 2021. https://dailyhive.com/vancouver/vancouver-homebuyer-down-payments-parents-gifting.