Parents need to plan carefully if they are going to help their kids buy a house
A sign advertises a new home for sale in Carleton Place, Ont., on March 17, 2015. THE CANADIAN PRESS/Sean Kilpatrick
OTTAWA -- Buying a home is a big step for anyone and experts say that parents looking to help their children need to make sure it is affordable and that their children are ready for the change.
Chris Catliff, president and chief executive of BlueShore Financial, says his bank's seminars for parents looking to help their kids buy a house are always packed with mums and dads wanting to learn how they can help.
He says parents first need to ask themselves if they can help without compromising their own financial security.
"When you downsize your home and there is a lot of equity in it, that frees up capital that often is used for funding kids either first-time buy or move-up buy," he said.
But Catliff says you need to consider your own needs for that money and other savings and that may include long-term care in later years.
Once you figure out what you can afford, parents can help their children buy their first home in a number of different ways.
The most straightforward is to gift the money to your child, although Catliff says there are risks associated with it such as what may happen to the value of your gift if your child separates from their spouse or partner.
Instead of gifting the money, he suggests you could structure it as a loan that you could in the future forgive if you want, perhaps as part of your estate planning.
Parents could also act as a guarantor for a child on the loan, a move that would reduce the risk a lender faces and allow the child to obtain a better rate.
Other options could be to buy a property and rent it to your child as an alternative or co-ownership, where you and your child live together and share ownership.
Nathalie Weiner, a district vice-president at TD Bank in Ottawa, says a survey done by the bank found that one in four baby boomers are helping their children or grandchildren financially.
"If you're going to help out your child with a down payment, whether it is by form of a loan or a donation or a co-signer of a mortgage, you have to make sure that actually fits into your financial plan," she said.
Weiner said the cost of becoming a homeowner isn't just the price of the home and it is important that your child is ready to deal with those costs too.
"It's expensive owning a home. It's not the same as renting," she said.
"You really have to sit down, calculate it and make sure you can afford it."
Weiner said picking the right way to help your child buy a house, whether it is a gift, loan or other way, is about striking a balance with your own financial plan.
Catliff says parents looking to lend or give the money also need to plan where they money will come from.
If you're selling an investment that has risen significantly to make your gift, you may be faced with a large tax bill if you don't have other losses that you can use to offset the gains come tax time.
Buying a home is a big step and Catliff says parents who want to help their children need to be sure their child is ready to become a homeowner.
He says parents want to give a helping hand, but it can be highly emotional and you can run the risk of hurting your relationship with your children.
"It's really important to plan it and get good financial advice," he said.