Should you help your adult child buy a house?
Is the Bank of Mom and Dad open for business?
A recent study found approximately 4 in 10 parents of younger homeowner adults (age 18-38) in Ontario helped their children financially with their purchase. The average gift? More than $70,000. Of those who helped their children, 44% used their own savings to support their child, while 15% borrowed from retirement savings or investments.1
Put yourself first
Supporting your child’s homeowner dream is a generous gift, but don’t put your financial health at risk. Helping your children out shouldn’t come at the expense of your retirement plan.
Questions to ask
If you have more than one child, will you extend financial assistance to your other children as well? How will you balance the wishes of one child versus other children?
How will you manage your child’s house expectations versus what you can afford to help with?
Have you considered the impact of the current housing market and interest rates?
Have you carefully considered all the financial and legal risks associated with extending assistance to your child?
5 ways to lend a hand
1. Loan money
Offering money for a down payment can be a great option if you have the means, and if you’re comfortable with your child repaying the loan over time. But be sure to work with a lawyer to formalize the agreement and make it legally binding; this will help avoid misunderstandings or strained relationships down the road.
2. Gift money
Providing a gift for your child’s downpayment is a generous gesture that can significantly ease the financial burden on your child. Not only that, but gifting in life also provides an emotional reward – you get to see how the money is making a difference in your child’s life. Unlike a loan, a gift doesn’t need to be repaid, and it allows your child to start their home ownership journey without the added stress of debt.
But know that you lose control of the funds as soon as you gift them to your child. In other words, if your child decides to use the money for something other than what you intended, it’s their choice – and you need to be ok with that.
3. Co-sign a mortgage
If your adult child doesn’t have a strong credit history or income, consider co-signing the mortgage to help them secure a loan with better terms. You won’t have to access your own capital or liquidate any of your investments, your child can leverage your higher credit rating, and they’ll have the opportunity to access a lower interest rate and higher loan amount.
However, you should be aware that if your child experiences financial troubles (job loss, divorce etc.) and is unable to make the mortgage payments, you are legally required to do so. This could create financial hardship and potentially affect your credit score.
You might also want to consider buying a life insurance policy with your child as the beneficiary. In the event of your child’s passing, your debt obligation is eliminated – and, if your child has a dependent family, the insurance could pay off the mortgage.
4. Buy a house for your adult child to rent (with the option to buy later)
You may not have thought about using real estate to build out your investment portfolio, but buying a house and renting it to your child may be a way to do just that. You can purchase a home, rent it out to your adult child at a fair market rate, and then consider saving the rent money for the child to use to eventually buy the home.
Another option is to invest in real estate directly with your adult child. This could involve buying a property jointly and either renting it out for income or living in it together.
Be sure to consult with a lawyer to draft a formal agreement that outlines the arrangement you and your child agree on.
5. Set up a discretionary trust
While it’s a more complicated process, parents can purchase a property, transfer it to a discretionary trust and allow an adult child to live in the home. A discretionary trust allows the trustee (parent), to retain complete control over the property, and decide when they want to transfer the property to the beneficiary (adult child).
Talk to us.
If helping your adult children get into the housing market is part of your financial plan, please talk to us. We can help you work through what option may make the most sense for your financial situation.
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1 4 In 10 Parents of Young Ontario Homeowners Financially Helped Their Child Achieve the Dream of Home Ownership (orea.com)