On the long list of parental responsibilities, helping kids buy their first home is making its way to the top. Competitive housing markets are surely contributing to the need for financial assistance but there are other factors. Compared to previous generations, our kids 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.
In varying degrees, parents across Canada are helping kids enter the real estate market. In B.C. and Ontario, the provinces with the hottest housing markets, 42% and 35% of these home buyers, respectively, received financial help from family, according to research from Ratehub. The Atlantic Provinces had the lowest rate of assistance at 18%.
Parents helping kids buy a house can make sense, but only if mom and dad aren’t putting themselves in a financial bind with their assistance.
Much of the money parents contribute is going toward the down payment, but how much people put down varies from province to province. In B.C. and Quebec, 45% of home buyers put down at least 20%, according to Ratehub. In Ontario it’s 38%, while only 20% of people in Manitoba and Saskatchewan meet the 20% marker. Those who don’t put down at least 20% are required to pay default insurance premiums. The amount you pay for this insurance declines as your down payment increases.
The financial implications of your helping hands
Parents helping kids buy a house can make sense, but only if mom and dad aren’t putting themselves in a financial bind with their assistance. “If you’re not putting your own financial plan in jeopardy and your child is prepared for the fiscal responsibilities, helping finance a home can be a great way to set a solid foundation for them,” says Duane Bentley, Vice-President of Banking and Mortgage Distribution at Investors Group.
However, parents do need to consider the implications of helping, especially when it comes to three main financial assistance options.
A loan can be a good way to top up a down payment after the minimum is met or it could be used to cover closing costs. But take note: parents will have to declare interest from the loan on their tax return, says Bentley.
Many parents co-sign for a house, and while that can get children their own abode it comes with risks, too. If the kids default on their mortgage payments, the co-signees would be on the hook to cover the costs.
One of the easiest ways to help a child is to give them a financial gift. There’s no tax on cash gifts, but if the gift is the outright purchase of a house for the child, then the parents may have to pay capital gains on the eventual sale of the house.
Of course, each option for helping a child purchase a home should be considered in the context of family and financial situations.