The Greenhouse
by Pine

The “Bank of Mom and Dad”: Helping your kids get a mortgage

It's not just about how much you might be able to give your child, it's also important to think about how you give.

In case you missed it, owning a home can be hard in Canada.

For a lot of Canadians, the numbers just don't add up when it comes to purchasing their first home. But here's the good news: you might just hold the key to making your child's homeownership dreams a reality. Whether it's dipping into their savings or leveraging their own home equity, parents can give their kids the financial boost they need to finally step onto the property ladder.

By the numbers

In case you missed it, owning a home can be hard in Canada. With the rise of interest rates and inflation, it can be hard getting your foot in the real estate world. But despite these roadblocks according to a Royal LePage survey, 51% of millennials plan to purchase a home within the next five years. But how they plan to is a different story. 

According to a recent report from OREA, four out of 10 parents with children aged 18 to 38 provided support for their kids to financially afford a home. 

And for those parents who helped their kids, 71% provided a gift and 61% a loan, which  averaged out to be $71k and $41k respectively. 

How can you help your child?

But it's not just about how much you might be able to give your child, it's also important to think about how you give it. You want to choose a method that works for you and won't put your own finances at risk. Once you've decided to help out your kids, there are a bunch of legal, financial, and relationship issues to navigate.

One big question for parents is to ask yourself how you can protect the money you’re giving to your kids. For example, what happens if your son or daughter goes through a divorce or gets into financial trouble? Laws in different provinces dictate that the equity of a family home is generally split between spouses in the event of a marital breakdown, so it's important to plan for the worst-case scenario.

If you're considering helping your kids buy a home, there are a few options to think about. 

Legal and Financial Planning

It's crucial to engage in meticulous legal and financial planning to safeguard the financial help you're providing. This might involve consulting with a financial advisor or an attorney to explore the best strategies for providing financial assistance without jeopardizing your financial security or potentially becoming entangled in your child’s future financial issues.

Offer your child a loan

One option you have if you want to help your kids buy a home is to give them a loan. It could be as simple as a chat over breakfast where everyone agrees on the terms, but to avoid any misunderstandings, it's best to draw up a formal loan agreement. This way, everyone knows what's expected and the loan can be legally secured against the property. However, there are some uncomfortable questions to consider, like what to do if your kid can't pay it back.

If you're considering this option, it's a good idea to talk to a lawyer. Your loan agreement should include all the details, like the interest rate, the repayment schedule, and the due date.

Give a down payment gift

Helping your child with a down payment on their home can be a great way to support their financial goals.  A recent study revealed that 35% of first-time homebuyers in Canada were beneficiaries of a lump-sum payment from a parent or relative. Furthermore, in the economically steep region of Ontario, data from the Ontario Real Estate Association indicated that approximately 40% of parents have financially assisted their children (aged 18 to 38) in purchasing a house. The financial aid provided averaged at $71,000 in the form of a gift, or alternatively, a loan amounting to $41,000.

However, if you're considering gifting a down payment, it's important to understand the options available to you and the potential risks involved.

One option is to take out a home equity loan against your own home. This allows you to access the equity you've built up in your home and use the funds to help your loved one with their down payment. The advantage of this approach is that it's considered a loan, rather than a gift, so you won't have to worry about paying income tax on the money you provide.

When it comes to giving a down payment, there's no limit on how much you can give or receive, but most tend to give around 20% of the purchase price to avoid mortgage insurance premiums.

It's also important to keep in mind that your lender will require documentation showing where the gift money came from. So, make sure you keep a paper trail that way, you can help the mortgage approval process go smoothly and avoid any headaches.

However, even if you provide a substantial down payment, your child will still need to qualify for a mortgage based on their income, credit score, and debt ratios

Give money to invest in a First Home Savings Account

When it comes to assisting your adult child in stepping onto the property ladder, one impactful approach is to guide them in strategically investing any financial gift and capitalizing on the First-Time Homebuyer's Incentive. Launched in 2023, the First Home Savings Account (FHSA) emerged as a novel initiative designed to assist first-time homebuyers in financially preparing for their initial home purchase. 

Bearing similarities to a Tax-Free Savings Account (TFSA), contributions to an FHSA experience tax-free growth. Individuals are permitted to contribute up to a lifetime maximum of $40,000, with the flexibility to withdraw the funds tax-free for the purchase of their first home. 

While you cannot directly contribute to an FHSA, your adult child can channel up to $8,000 per annum into their account, with a lifetime ceiling of $40,000.This strategy seamlessly dovetails with the utilization of the Home Buyers' Plan (HBP), which allows up to $35,000 to be withdrawn tax-free from an RRSP for a home purchase.

Be a co-borrower or guarantor on their mortgage loan 

If you're not keen on giving a gift or taking out a loan to help your child or family member with a down payment, you could consider being a co-borrower or guarantor on the mortgage. This means that you're essentially helping your loved one qualify for a mortgage by adding your name to the loan application. As a co-borrower, you'll be equally responsible for making mortgage payments, and your credit score and income will be taken into account during the application process.

Being a co-borrower on your child's mortgage can be a great way to help them get into a home that they might not otherwise be able to afford. It's important to remember, though, that if your child defaults on the loan, you'll be responsible for making the payments. Additionally, if you're a guarantor on the loan, you'll be responsible for paying the loan in the event that your child is unable to make the payments.

One benefit of being a co-borrower or guarantor is that your gift is considered an investment, and you'll have the potential to earn a return on that investment when the property is sold. You may also be able to claim tax deductions on the interest paid on the mortgage. However, it's important to consult with a financial advisor or tax professional to fully understand the tax implications of being a co-borrower or guarantor.

The bottom line…

Helping your child acquire their first home can be a rewarding endeavor, but it's paramount to navigate this journey with financial prudence and clear communication. In conclusion, if you're a parent, there are several ways you can help your child afford a mortgage. You can consider providing a gifted down payment, being a co-borrower or guarantor on the property, or taking out a home equity loan against your own home. But before you make any decisions, it's crucial to understand the possible risks and tax implications involved. It's also important to have open communication with your child about what you expect from the situation. By taking these steps, you can provide essential support to help your child achieve their dream of owning a home.

If you’d love to discuss your options, you can also have your child start their home buying journey with Pine by providing their information–then we’ll put them in touch with one of our expert mortgage agents to answer any questions.

Question? We've got answers.

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