Leveraging Your Home Equity to Help Purchase a Home For Your Children: A Prudent Move?
October 6, 2023 | Posted by: Harold Hagen
Navigating Parental Assistance in Home Purchases
The concept of parents aiding their children in stepping onto the property ladder is not a new one yet it is not ubiquitously adopted. A 2021 CIBC report illuminated that 30% of first-time homebuyers in Canada were bolstered by familial financial support, with the average monetary gift oscillating around $82,000, and surging to $130,000 and $180,000 in the metropolitan hubs of Toronto and Vancouver, respectively. Now this number is definitely higher. While it may be assumed that such substantial parental contributions are often derived from debt, CIBC estimates a mere 5.5% of parents resort to borrowing to facilitate their children's home purchases.
Strategizing Financial Assistance for Your Offspring's Home Acquisition
Parents can explore various avenues to financially assist their children, such as utilizing a Home Equity Line of Credit (HELOC) or procuring a mortgage. HELOCs, often hailed for their flexibility and lower payment requisites, typically necessitate interest-only payments. Conversely, mortgages, while generally offering lower interest rates, demand blended payments, encompassing both interest and principal, thereby exerting a more pronounced impact on cash flow.
If the debt is envisioned as a short-term obligation, potentially preceding a downsizing, the rationale is apparent. However, it's imperative to navigate this financial strategy without precipitating your own downsizing or impeding your children's progression. The transient interest cost may be deemed a palatable sacrifice for the collective benefit of all involved parties.
Ensuring Financial Prudence
Embarking on this financial journey necessitates adherence to standard approval criteria, which may pose challenges, particularly for retirees with diminished or investment-derived incomes. While reverse mortgages emerge as a viable alternative should traditional financing prove elusive, exercising caution to safeguard your own financial stability in retirement is paramount. Additionally, with the potential for fluctuating home prices and the risk of not realizing anticipated returns from a home sale, a meticulous approach is crucial.
If your financial portfolio includes investments, particularly within a taxable non-registered account or a Tax-Free Savings Account (TFSA), utilizing these funds prior to resorting to borrowing may be a smart strategy, especially in an environment where achieving a return on investments that supersedes your debt's interest rate proves challenging.
Navigating the Complexities of Purchasing a Home for Your Children
Parents must tread cautiously when considering purchasing a home for their children, particularly if their children are unable to qualify for a mortgage independently, signaling potential financial instability. If the funds are intended as a gift, with no expectation of reimbursement, the scenario alters somewhat. However, ensuring that your generosity does not inadvertently saddle your children with a financial burden they cannot sustain is crucial.
Moreover, purchasing the property in your name, as opposed to your child's, introduces potential complications, such as capital gains tax liabilities should the property appreciate in value. Furthermore, maintaining ownership of the property may become complex, especially if your child enters a relationship and their partner resides in a home owned by their in-laws. Despite benevolent intentions, the desire for autonomy may prompt your child and their partner to seek ownership of their dwelling, rather than residing 'under your roof' until inheritance transpires.
If you need any answers to any of the above we would be more than happy to assist you.