Your child is ready to fly on their own, but can they afford it? With the current state of the real estate market, they will probably have to wait many years before they can buy their first property. How can you help out?
Precautions to Take
Your love for your child may blind you: First, make sure you do not compromise your own financial stability or pension capital. You would not want your gift to become a burden!
Also, be careful not to unintentionally harm your child by making them depend on you. It is an honourable thing to help your child financially, but beware! This gift could prevent them from claiming their independence or even damage family harmony; money is a delicate subject that can create tension between you and your child, or between them and their siblings.
To avoid any inconvenience, you will only be successful with healthy and sincere communication.
Communication: An Essential Step
To determine if your child is 100% ready to buy their first property, you need to sit down and have a good conversation with them.
Are they ready to assume the responsibilities that come with buying a house or condo unit? Together, examine their credit history, their income, their savings and the various resources available to them to counteract any unexpected event.
Is their life stable? Does your child believe that they will keep their current job for a while? If they plan on buying a property with a partner, address that relationship: Is it a strong one? This may be a thorny subject, but ask anyway: What will happen to the house if the couple breaks up?
You will find a summary of the expenses to consider before buying a home here.
Some parents prefer not to leave an inheritance because they believe that their children most need financial support during their lifetime—when they want to purchase a property, for example. Since cash gifts are tax-deductible, unless they are used to generate income (for example, by buying an apartment building), this seems like a simple and favourable solution.
However, be sure to keep enough money aside to ensure your comfort as you get older. Remember that your health could deteriorate and lead to unexpected expenses…
For most first-time buyers, who do not have a lot of money saved up, the down payment is the biggest obstacle. Thus a young adult who wants to buy a property will definitely benefit from a gift or a loan from his parents.
In the case of a loan, it is better to protect yourself. In an article in Les Affaires, François Morency, President of Conseils financiers Aviso, recommends parents “[to] require their child to take out disability insurance, critical illness insurance and life insurance for which they will be the beneficiaries in case of death” (loose translation).
But beware: Do not withdraw money from your home equity line of credit or RRSPs! You could kick yourself if an unexpected event strikes.
Your Will: Avoid Misunderstandings and Family Conflicts
In a scenario where you have given money to help only one of your children purchase a home, make sure that you do not upset your other heirs. Le Bel Âge magazine offers some tips for preventing family conflicts, such as “changing your will to leave more money to heirs to whom you have not made any cash gift” (loose translation).
If it was not a gift, but a loan, its terms must be defined and transcribed, and your child must inform the estate. Upon your death, your indebted child will be liable to the estate: To help him manage the situation, give them a statement after each payment. You can also specify in your will that you do not want the indebted child to repay the estate.
In any case, do not forget to consult a notary to make sure everything is in order.
Other Ways to Help
To help your child, you may want to become a co-owner. Before signing anything, make sure that you will be able to pay the bank if your child can’t. If you are already a homeowner, do not forget that you will have to pay taxes in double and that the sale of one house or the other could cause important tax complications.
Many banks are reluctant to lend a mortgage to a young adult who has little credit or a low salary, so you could help them by co-signing or even endorsing it. Again, this solution has its share of risks. You will be responsible for mortgage payments if your child is no longer able to pay them.
For the bravest, a multigenerational home could be a great solution! This type of housing brings together several generations of the same family in a single-family home composed of two independent dwellings. If cohabitation does not frighten you, you and your child will be able to share the expenses and responsibilities that come with being homeowners.
You can also offer them to cover certain expenses, such as those of the notary or the moving company.