What Are the Best Ways to Help Your Child Buy a Home?

The younger generation often has their work cut out for them when it comes to buying a house in today’s market. Though prices outside of the GTA are more reasonable, real estate values anywhere are enough to give anyone pause. 

Now imagine trying to climb that mountain without years of equity growth behind you. That is the reality that many young buyers are facing. Anyone fortunate enough to have support from parents or grandparents is at a huge advantage, both now and later in life. 

If you’re considering helping your adult child take their first step onto the property ladder, there are a few ways to go about it. As always, you’ll also want to know about the risks and complexities involved. In this post, we’ll outline some of the strategies for helping your children buy a home. 

Buying a house is personal, whether it’s for yourself or you’re helping someone else. In either case, our team is here to support you. Book a Complimentary Buyer’s Meeting for some ideas on your next steps. 

Can I Use My RRSP to Help My Kids Buy A House?

If you’ve been diligently saving for some time, there could be a sizable sum in your retirement accounts. Can you use your RRSP to partially fund your child’s home? More importantly, should you? 

First, a quick disclaimer: please take the following for information only, not as personal advice. We strongly recommend speaking with an experienced financial advisor before touching any of your retirement savings for any reason, including helping your child buy a house.

Certain funds, such as a Locked-In Retirement Account (LIRA), won’t even let you pull money out until you’ve reached a certain age. Other funds allow you to withdraw at any time, but this can have significant tax penalties. 

Tax considerations aside, remember that every dollar you pull from your RRSP is no longer working for you. For that reason, we recommend that you avoid touching these accounts if there’s even a remote possibility it could lead to financial hardship later. 

There are other ways to help your loved one without jeopardizing your own future. To start with, talk to a real estate agent about some of the government plans for first-time home buyers, like the Home Buyer’s Plan or the First Home Savings Account. 

Help or no help, buying that first home requires some creative thinking. If you’re looking for ideas, read 6 Innovative Ways First-Time Homebuyers Can Beat The Tough Market next.

Provide a Gift Letter for Down Payment

Even for a young professional with a higher-than-average income, saving for the down payment is challenging. The minimum is 5%, which works out to $25,000 on a $500,000 house. 

Note: placing less than a 20% down payment results in a high-ratio mortgage, which is riskier for the lender. As a result, CMHC mortgage insurance is required. 

For more expensive properties,a buyer needs that first $25,000, plus an extra 10% on any amount from $500,000 to $1.5 million. 

The gold standard of 20% for a down payment applies in two cases: 

1. Whenever a buyer is looking at a property priced at $1.5 million or more
2. A house at any price when the buyer wishes to avoid mortgage insurance 

It must be a gift, not a loan.

Providing some or all of the down payment is a major boost that helps first-time buyers overcome one of the most significant hurdles to getting into the market. There is a caveat, however. 

You must prove that these funds are a true gift, not a loan that you expect to be repaid in the future. Many lenders will require an official letter stating that your contribution is a gift before authorizing your child’s loan. 

Wondering what homes are available in Barrie and the surrounding areas? Find out by browsing our featured listings. 

Co-Signing A Mortgage 

Co-signing the mortgage is another way to help a younger buyer, although it goes without saying that this path requires a deep level of trust. Otherwise, your own credit rating could be impacted if your child falls behind on their payments and is too embarrassed to tell you. 

If you’re co-signing the loan, you can protect your financial interests by also putting your name on the title. However, this option also has risks, even if there is a high level of responsibility and trust all around. 

For example, if your child is currently married, then gets divorced, their spouse will have a stake in the house unless a signed marriage contract states otherwise. Alternatively, if someone tries to sue the property owner, you could find yourself liable along with your child.

Capital gains are another consideration. If you already own a home, your stake in your child’s property will not fall under the primary residence exemption. If you decide to sell, capital gains will apply. 

While legal and tax matters are beyond the scope of this blog, joint ownership or co-signing can be excellent ways to give your child a head start. Just be sure to act under the advice of an experienced family lawyer. 

Holding a Mortgage for Your Child 

More and more, young home buyers are turning to the “Bank of Mom and Dad” to finance their purchase. You’re not necessarily putting your name on the title, so you have the benefit of separation in the event of a lawsuit. In addition, you’re not putting your credit history at risk because you are the lender, not the borrower. 

• Other advantages are the ability to set your own interest rate, which could even be 0%. 
• If you do charge a small amount of interest, those funds stay with your family instead of going to the bank. 
• Your child doesn’t have to worry about a stress test, mortgage insurance, or a complex approval process. 

If you have the funds and lending the money won’t cause financial strain, holding the mortgage can be the way to go. Once again, though, there are implications to consider. 

• If you do charge interest, that is likely taxable income. 
• There is a financial risk to you if your child defaults on the loan. 
• You’ll need to account for any legal loopholes if your child marries and the house becomes the matrimonial home. In this case, you’ll want to carefully document that this is a loan that needs to be repaid. Otherwise, the ex-spouse might be able to wiggle out of paying their share. 

If you decide to hold the mortgage, the answer is simple: get everything in writing and make sure everyone understands the terms. Even though it’s family, try to keep emotions out of it and treat it like a business transaction. In addition, make sure you consult a lawyer so that everyone, including spouses, knows their rights and responsibilities. 

Gifting Property to Children 

Few people are in a position to outright gift a house to their child. However, if you have the means, almost nothing is more impactful to their financial well-being.  

Early in life, they’ll be free and clear of rent or mortgage payments, which eliminates a major monthly expense. Ideally, those extra funds can be invested or go to retirement savings. In the meantime, just owning property allows the new homeowner to begin building equity. 

On paper, the process of gifting a house should be as simple as visiting a real estate lawyer and transferring the title. However, there are a few things to keep in mind. 

When gifting any home other than your primary residence, you will trigger capital gains. The government views the transfer as a transaction at fair market value. This is true whether you sell the home for “$0” or at a deeply discounted price. 

Are you planning to help your adult child find a home in Barrie or Simcoe County? Here’s Why Home Buyers Love The Peggy Hill Team.

The “Sell Your House to Your Child for $1” Fallacy

There is a bit of a misconception that you can avoid some taxes by selling the property to your child for $1. Unfortunately, this tactic can actually backfire when and if they ever decide to sell the house. Note: 

If you give the house free and clear, your child will be deemed to have acquired it at fair market value. If they later sell it at a profit, they’ll be taxed on a percentage of the increase, just like anyone else. 

Here’s where trouble can arise if you sell the house for a deep discount, like at $1. If that $400,000 property increases in value to $100,000, your child will be subject to taxable gains on the entire amount (minus the $1 purchase price). 

The government will calculate the gain at $499,000, 50% of which is subject to capital gains, which means adding $250,000 to their taxable income in the year they sell the house. 

At the risk of sounding repetitive, always be sure to follow the guidance of an experienced real estate agent and an attorney before signing anything official. Done right, your generous assistance in any shape or form can lead to a lifetime of security and prosperity for your child and their family. 

Do you have questions about living in Barrie or buying your first home here? Get in touch with The Peggy Hill Team today at (705) 739-4455 or email info@peggyhill.com. We are happy to help you get started!