The Best Ways to help Adult Children Purchase their First Home

There was a time when if you wanted to buy a home, you had to save the money. That was in the days when you could put down $1,000 and you were well on your way.  While some have the resources to put together the funds, more often than not younger people need help with their first home purchase.

A recent study by the Bank of Montreal indicates that about 42% of young people wanting to buy a home count on money from family for the down payment.

Because house prices are so high, many parents in the Boomer demographic have benefited in that they have a high degree of equity in their homes.  The down side is, of course, home ownership is out of reach for their children.

Before the Bank of Mom and Dad opens for business, parents should get some advice about helping adult children financially.  Not necessarily about whether or not it’s a good idea, but advice on strategies to maximize lending programs and optimize tax advantages.

For example, for proactive families thinking a few years down the road, money can starting going to adult children far in advance of the home purchase in the way of an early inheritance.  Money gifted by the parents to the kids can go into an RRSP.  The tax refund as a result of putting money into an RSP can boost the future down payment.  When it’s time to buy, the money is there – tax free – and the home can be purchased using the Canada Home Buyers’ Plan.

Not everyone is aware of this strategy.

Another is to not give the adult child money but to co-sign the mortgage, if the parents have the credit and the adult child has the money.

Parents interested in exploring options that work for all parties should discuss options with a lending specialist.  BMO offers seminars for families so that parents can leverage the equity in their homes to provide what lenders are calling a “living legacy”.

It doesn’t always have to be from scratch.  Some adult children can scrape together 5% for a down payment but with the new mortgage rules, the type of property they may be able to afford may not fit their needs.  A financial boost from parents, especially in light of the fact that adult children who have saved at least 5% shows some financial acuity, can do a few things:

• Allow adult children to purchase a more appropriate property in a good neighbourhood
• Bump up down payments to 20% to save mortgage insurance costs and monthly payments

Parents can assist in other non-monetary ways if they’re not able to absorb the impact of dipping into their home equity or if assisting will impact their retirement plans.  They can let adult children and grandchildren move in so that they can save for a down payment faster.

A financial adviser can give objective advice and help lay out a plan – whether that’s guaranteeing a mortgage or becoming an investor in the property.

A loan, if spelled out on paper, can be repaid to parents in the future when their children have built up enough equity to take out their Home Equity Line of Credit or if they choose to sell and move-up to another home, returning proceeds to their parents with or without interest – whatever the agreed upon terms might be.  It might be prudent to bring in accountants and lawyers during this process.

Whichever route families take, it’s important to have a meeting with a lending professional as a family and make sure that everything is on paper.  Expectations, timelines, dollar amounts and/or percentages.  The last thing you want to do is ruin your relationship over money.