Are you thinking about helping your child buy his or her first home? If you are, you’re not alone. Here, some key things to consider.
More than a quarter of first-time home buyers in Canada got financial help from their families by way of either a loan or a gift, according to a recent survey by Genworth MI Canada Inc., the country’s largest private mortgage insurer.
With skyrocketing housing costs in cities like Vancouver and Toronto, it’s understandable that coming up with a down payment on even a modest home can be a challenge.
“This is a very important subject,” says Scott Hannah, President and CEO of the Vancouver-based Credit Counselling Society. “There’s lots to think about, but everyone needs to remember there is a huge difference between feeling obligated and being obligated.”
Parents who can realistically afford to help with a down payment should consider a number of important factors, the first of which is whether that help would be a loan or a gift. Hannah says he personally prefers the gift option since he’s seen too many relationships fall apart over repayment issues. And he also prefers smaller gifts over bigger loans – but only under certain circumstances.
The key things Hannah says parents need to think about when deciding whether to help out with home ownership.
1) Know how your kid deals with money: Are they living within their means, carrying consumer debt, putting money aside for retirement? “If they aren’t managing their money effectively and haven’t set any financial goals you’re doing them a disservice giving them a down payment,” says Hannah. Credit card debt, for example, is serious cause for concern and needs to be paid off before any consideration is given to taking on a mortgage, he adds. “If your kids haven’t learned to set aside some of their own money, you shouldn’t feel obligated to part with yours.”
One option – if you can afford it – is to offer to match, dollar for dollar, what your kid saves – once he or she has saved their portion first. Your son or daughter has to be prepared to make sacrifices for what they want – they’ve got to have some skin in the game. We have to remember we’re not there to be their friend, we’re there to be their parent and offer good guidance.”
2) Can your kids realistically afford to own a home? Home ownership is a costly proposition. Not only do household incomes have to be able to carry mortgage payments, but there are all the other related costs as well, like property taxes, ongoing maintenance, insurance, and in some cases condo fees. And at the time of purchase it’s not just the selling price they need to contemplate. There are legal costs and other expenses associated with closing the deal. “Kids need to understand the true cost of home ownership and still be able to set aside funds for emergencies, which always come up at the worst possible times,” says Hannah, pointing out that new home owners are most at risk when a financial emergency arises and are often forced to sell – and at a loss.
3) If you can’t/don’t want to help financially, there are options: Hannah says another way parents can help is to offer kids a chance to live at home rent-free so they can save for a down payment. “But you must define the terms of engagement,” he emphasizes, suggesting parents establish the maximum time kids can stay and how much they’ll contribute to household expenses and the cost of food while at home.
4) Parents should never jeopardize their own financial situation to help: “I would encourage parents to first seek professional financial advice before they dip into their own savings to help their kids buy a first home,” says Hannah. “They need to ask, ‘what’s the impact if we were to give our son or daughter X number of dollars’? There is real value in getting third party advice because it’s objective and there’s no bias.”
Too many times, Hannah has seen parents use a line of credit to help their kids with a down payment, something he strongly advises against. He also suggests parents insist their kids go to credit counselling if they’re concerned about how they’re managing their money. If the kids refuse “that tells you something,” he says.