By Adam Mayers, Personal Finance Editor
One of the biggest ways parents helping kids is with a down payment for a house or condo. Here’s how to keep emotions out of the mix.
When parents lend money to kids it can tie families up in knots, creating jealousies and triggering feuds that may never be resolved.
That’s because the situation is fraught with emotion, becoming as much tied up in the familial relationship as it is about the business arrangement at hand. That’s why mixing feelings with finance is such a difficult thing.
One of the biggest ways parents help kids is with the purchase of a first house. For many, it is a way to pass on good fortune and give young adults a leg up. Anyone who bought a home in the GTA in the past 25 years ago has done very well. Paying it forward is rewarding.
A study sponsored by the Bank of Montreal shows how the trend is accelerating. For first-time homebuyers, the Bank of Mom and Dad is the go-to lender for a down payment.
Pollara Strategic Insights found that 42 per cent of first-timers are depending on some family help, up 12 percentage points in a year. That support is equal to 12 per cent of the cost of a home, or an average $37,500 a year.
A study by the Canadian Association of Accredited Mortgage Professionals (CAAMP) last fall reported the same trend, though less pronounced. CAAMP found that 18 per cent of first timers are relying on family help, with 11 per cent getting the money as a gift and 7 per cent as a loan.
If family financing is in your home-buying cards, here are some things to consider:
Gift or loan? If it’s a gift, then there are no strings attached. If it’s a gift against a future inheritance, it’s worth making that clear and recording it, so everyone know, says real estate lawyer and Star contributor Mark Weisleder.
“The main thing is to get it in writing,” he says.
Secure the loan: A loan will mean some form of security, likely a second mortgage registered on title. The bank will have to know about the family loan and approve.
Parents may also ask for a promissory note as proof of the loan and secure the loan against title. The loan, plus interest, could be repaid in full later, or never, but at least it’s on record. Weisleder says a promissory note gives parents protection if things later break down. Maybe the couple splits up, or lose jobs in a downturn and the house has to be sold.
Joint ownership: In some cases, where the children, or couple’s income is too low to meet bank financing requirements, parents are guaranteeing the mortgage offering their own income as security.
In this case, the bank may want the parents on the title to the property and to sign the mortgage indicating their share of ownership. It may be as little as 1 per cent, but this still leaves them on the hook to carry everything if the kids default.
Getting the money back: It can get complicated when parents want out. They can sell their interest to the kids, or give it back, but they would have to tell the bank and do it properly. Otherwise they could be in default of the mortgage, Weisleder says. Another option is to leave the stake to the kids in a will.
There’s nothing more rewarding than helping your kids, especially as a way to pay forward the same help you might have received all those years ago.
The trick is to leave emotions at the door. Discuss the implications and do it in the open to avoid bad feeling later. Above all, get the legal help you need.
Adam Mayers writes about investing and personal finance on Tuesdays and Thursdays. Reach him at firstname.lastname@example.org
Where 1st-time buyers get down payments:
- Savings: 40%
- Bank loans: 27%
- RRSPs: 12%
- Gifts from parents: 11%
- Loans from parents: 7%
- Loans from employers: 1%
- Other: 2%
Source: CAAMP, Nov. 2014