It’s not an easy decision for parents to make. But you’ve opted to help your children purchase their first home. This is an incredibly generous gesture, one that is becoming more common — indeed, more parents are helping their children purchase their first homes.
According to Ratehub, in British Columbia and Ontario, the provinces with the hottest housing markets, 42% and 35%, respectively, of homebuyers received financial help from their families. The Atlantic Provinces had the lowest rate of assistance at 18%.
Much of the money parents contribute goes toward the down payment; but again, the amount varies from province to province. For example, in British Columbia and Quebec, 45% of homebuyers put down at least 20%. In Ontario it’s 38%, while only 20% of those in Manitoba and Saskatchewan meet the 20% marker, also according to Ratehub. Twenty percent is a key measure as those who put down less are required to pay default insurance premiums. The amount you pay for this insurance declines as your down payment increases.
“Competitive housing markets are surely contributing to the need for financial assistance, but there are other factors,” says Dwayne Rettinger of Rettinger & Associates Private Wealth Management. “Compared to previous generations, children have to stay in school longer to effectively compete in the job market, while the cost of post-secondary education steadily rises. Many university graduates are strapped with student loans that make saving for a home difficult, too.”
Dwayne Rettinger notes that although parents helping kids to buy a house can make sense, the parents need to consider the financial implications. But if you’ve decided to take the plunge, here are the three main financial assistance options:
1. Loan: A loan can be used to top up a down payment or to pay for closing costs. But, Rettinger notes, the parents will have to declare any interest from the loan on their tax return.
2. Co-sign: Many parents co-sign for a house, but that also comes with some risk. If the children default on their mortgage payments, the co-signees would then have to cover the costs.
3. Gift: This is one of the easiest ways to help your child finance a down payment. Take note that if the gift if used for the outright purchase of a house, the parents may have to pay capital gains if the home is eventually sold.
If you’re a parent who wants to help your kids buy their first home, make sure you do it without putting your own financial future in jeopardy. Don’t forget that you’ve got retirement savings to think about as well. Before you take any action, seek the assistance of a professional financial advisor.
Rettinger & Associates Private Wealth Management
Investors Group Financial Services Inc.
This is a general source of information only. It is not intended to provide personalized tax, legal or investment advice, and is not intended as a solicitation to purchase securities. Dwayne Rettinger is solely responsible for its content. For more information on this topic or any other financial matter, please contact an Investors Group Consultant.