Parents come to me all the time
wondering if they should help theirs kids get a start in life by loaning them a
down payment for their first home purchase. Should they gift or loan them
money?
The answer
to this question is maybe. Getting a start in the housing market can
be very difficult for kids. Gone are the days when the local bank manager can
be of any help when it comes to knowing the family and giving someone a
recommendation to get them approved.
These days kids require perfect credit scores, credit history, low or
non existent debt plus job longevity. The final decisions are made in large
financial centres like Toronto. Also to be considered, are the income to debt
ratios and whether they will require mortgage insurance. Phew that’s a lot to
handle.
I have seen many parents succeed in
loaning money but it has to be handled in a businesslike way in order for the
kids to realize just how fortunate they are and how careful they must be.
There are various ways that money
can be loaned.
Loaning
the money and parents being added to the title:
This scenario would mean that the parents loan an amount (usually 20% or more).
They are added to the title on the home (and sometimes the mortgage). Then the
child makes payments on that money until such time as the parents portion is
paid off and parents then remove their name from title. This should be written
up by the lawyer and should also be addressed in the parents estate plans. This
plan offers protection to the parents as they become co owners. However have a
good discussion with the mortgage broker before thinking of this plan as the
parents may need have to go on the mortgage, which can tie up their credit.
Plus the kids must be able to qualify for the mortgage alone once the parents
are removed. Also if you ever have to sell the house because of mortgage
default by the kids there may be relationship trouble.
Loaning
the money
: This
scenario would mean that the parents loan an amount needed
to help with down payment. This would be
written up as a loan with the child paying their parents accordingly. Interest
or not, that is your choice. The child
has to understand that this in effect is a second mortgage, so is not ideal.
Also the parents have no protection if the kids default on the loan. A lot of
parents struggle when the child has bad spending habits and misses payments. Or
the spouse of the child can feel deflated with their spouses parents helping
and theirs unable to help. Lots of open
discussion is required. The loan agreement should be written up by the lawyer
and should be addressed
in the parents estate plans. However have a good discussion with
the mortgage broker before thinking of this plan as the parents may also have
to go on the mortgage which can tie up their credit.
Gifting
them
the money:
Parents can just gift their child money at this stage
of life instead
of waiting until gifting at inheritance time. However I would suggest doing
this in writing with a lawyer and having long discussions ahead. Sometimes
siblings end up arguing if they don’t all get the same amount. Sometimes
in this scenario kids look at this money as additional free money
that they
have to spend, and then get themselves
in over
their heads buying a home that is too expensive. Parents will
also need to make sure they are the kind of parent that gives this gift freely
without strings. They need to be able to look the other way, let their child
manage their own money and not get mad every time they see poor spending
habits.
One
trick I have seen work very well is parents offering to match what
the kids are able to save. For instance, the child is sat down at a certain age
and they have a serious discussion with their parents. Tell them that if they
can save say $10,000(or whatever amount) in 2 years (or whatever time frame)
the parents will match that to help them buy a house. That way they realize
just how much work goes into saving that $10,000. If this option is chosen make
sure they are keeping you posted along the way and celebrate their
achievements.
Basically the decision goes on the
parents gut feeling and the history they have with their child. If they have
grown up accountable for their actions then it can be a very viable option. If
they are the kind of kids that feel they deserve it “just because”, then it doesn’t work as well.
For a free consultation meeting to
discuss and of these options feel free to contact me!