How helping the kids with a down payment affects you

OTTAWA – Helping your children with a down payment on their first home may be tempting, but financial advisers say to be sure to fully grasp how it will affect your own retirement planning before cutting a cheque.

Kristine Skinner, financial adviser with BlueShore Financial in West Vancouver, B.C., says before deciding to help, parents need to understand how it will affect their own net worth and overall financial plan.

“I would love to see both the parent and the child in my office so that they both understand the implications and expectations for every scenario,” Skinner says.

“With the parent and the child being in here, we can go over different considerations of the complexity of what they are planning on doing and any of the risks associated with the purchase.”

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A survey by the Bank of Montreal earlier this year found that 65 per cent of millennials said that they would rely, to some extent, on parents or other family members for financial assistance for as much as 10 per cent of the purchase price of their first home.

Skinner says there are several options parents could consider if they want to help their children buy their first home.

“Every parent and child or siblings are different, so it really is case-specific to your whole situation — there is no one answer for everybody” she says.

You can give the money to your children as a gift, a plan of action that could require a letter confirming the cash is indeed a gift that they are able to show their potential lenders. Or you could lend them the money, which would also need to be disclosed, including the repayment requirements.

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How you come up with the cash for a gift can vary. If you don’t have the cash on hand, you could cash out part of your portfolio or borrow the money.

If generous parents opt to sell stocks or mutual funds to help their kids come up with the money, they could face a hefty tax bill depending on the amount. If they borrow they money, they won’t have that problem, but will be charged interest and need to be sure that they have a plan to pay it back.

Skinner said parents could also sign as a guarantor on their child’s mortgage.

But if choosing that path, she added, “it is very important for the parent to really trust their child.”

Helping a child acquire more than the 20 per cent threshold for a down payment could help save them thousands, because they will not need the government-mandated mortgage default insurance.

Jason Hunt, manager of personal finance at Alterna Savings and Credit Union in Ottawa, said the amount a homebuyer could save by not needing that insurance could add up to tens of thousands of dollars, depending on the size of the mortgage.

“If you have a borrower who is close to that 20 per cent threshold, it may make sense to top them up,” Hunt said.

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But you also don’t want your children to buy more house than they can afford. Mortgage payments are only part of the cost of homeownership. Property taxes, utilities, insurance, strata fees, maintenance costs and emergency repairs all add up.

“You, as the gifter, have to be able to afford it as well as they, being the borrowers, have to be able to afford it on an ongoing basis,” Hunt said.

“You want to have an in-depth conversation with your children about what their monthly budget looks like and their ability to absorb any unforeseen expenses and ensure that they’ve actually built that into their budget before agreeing to help them.”

Skinner also notes that if you want to help your children buy their first home and you have more than one child, you should have a plan in place to ensure everyone is treated fairly.

“Some people may have it documented in their will that their son was given so much money and therefore they get that less out of the inheritance,” she said.