Although I am still young, I am one of those who was able to buy their first home at a price in the five figures. Although a correction may materialize in some markets, with rising mortgage rates and a probable recession, current real estate prices have many parents thinking about the possibility of their children becoming homeowners.
This is precisely what challenges Pierre, who writes to us: “With the rise in real estate prices, I see my children questioning their ability to become homeowners. They are 22 and 28 years old and new to the job market. What is the best way to help them financially to realize their plan to buy their first home? »
A question that resonates in my mother’s heart even if, for the moment, my concerns are mainly about work-family balance…
The first question that arises in such a case is: do you have a heart bigger than your wallet? If our reader’s eldest asks for his help in accessing homeownership, chances are his other child will come to him with a similar request someday. Pierre will therefore have to have a frank and open discussion with all his children and, subsequently, review his succession planning in order to preserve a certain fairness between them.
Our reader should also consider his own financial planning before going any further. Even if he wears his heart on his sleeve, a responsible father must assess whether he can indeed help his children without putting himself at risk. Does he have enough assets to finance the disbursements expected in his retirement? Has he subjected his plans to robustness tests, assuming longer than expected life, lower than expected yields or an explosion in the cost of his own life, for example?
The right time to become an owner?
In other words, the help that Pierre can provide to his children will have to take into account his own financial security. For some, a significant heritage means that the question does not arise. But for others, the answer is not so clear: it will require certain choices, good thought and advice from your financial planner.
Here are some avenues our readers could explore to help their children access homeownership.
Endorsement or co-ownership. Endorsing the loan, or becoming a co-owner with your child, is arguably the riskiest option. The parents then become jointly and severally liable for the entire loan taken out by their child. This option will also affect their own debt ratios, which may restrict potential business projects or real estate acquisition.
Money donation. Parents can donate money to their adult child. It is generally recommended to prioritize cash in a non-registered account or a TFSA before touching an RRSP.
In the case of a non-registered account, the state of the markets in recent months should also encourage our readers to take the opportunity to review their investment portfolio, and potentially resort to a capital loss strategy for tax purposes. . The gift should also be notarized in order to make it unseizable by the child’s creditors, and will make it possible to make it a separate asset whose value and appreciation will be excluded from a division of property if one day there were union breakdown in children.
Money loan. It is also possible to lend money to your children in order to take the property purchased as collateral. If you choose this option, you must review your will and plan what will happen in the event of your death. Will your child be released from this debt? Will his share of your estate be changed accordingly? This option should be considered if your assets are significant and your liquidities high.
Equity donation. Want to move into a smaller space? You could transfer your house to your child at a bargain price. The difference between the fair market value of the house and the agreed price will be transferred to the child in order to provide him with the down payment or to improve it. A strategy that could gain popularity — and which will be the subject of a future column.
In closing, one last question: is it really the right time to become a homeowner?
Because even if Pierre is convinced of his financial capacity, this important question is worth asking. He would not give his children a gift if his gift or his loan allowed them to acquire a house beyond their means. And if the project is considered on a longer horizon, the cash donation could soon present new advantages due to the implementation of the new CELIAPP (tax-free savings account for the purchase of a first property) , scheduled for 2023.