5 Ways to Help Your Child Buy a Home
Housing affordability has become more and more challenging, especially for young people. Read about different options to help your son or daughter buy their first home.
The first step is to take a financial reality check. Consult with an expert to see if your portfolio and financial situation will allow it. You should then have an open family discussion, especially if you are helping one child and not another. Work out how to maintain equity as part of your estate planning and thus avoid potential conflicts or disputes.
1. Co-sign a loan
When you co-sign for your adult
child’s mortgage, you not only become co-owner of the purchased property, but
also jointly and severally liable for the loan. Your debt-to-asset ratio and
credit rating will change, which could affect future real estate or other
projects. It’s something to think about carefully before deciding.
2. Cash gift
It is possible to make a cash gift to your child, and with no tax consequences! Verify
the method that would be most advantageous to you and that incurs the least
penalties. It’s always best to use cash reserves from an unregistered account
or TFSA before touching your RRSPs. It’s important to understand the tax
implications of your decision. For instance, what would be the capital gains if
you cash in an investment or sell a property? Document your gift in writing and
change your will so that assets are distributed in a fair manner between your
heirs (particularly for those who did not receive a gift from you).
3. Personal loan
With this option, the purchased
property could be used as collateral. However, remember to clarify key points
in a legal document: repayment terms, interest rate, what will happen in the
event of death, changes to be made to your estate, etc. Note that any interest
received from the loan must be declared for tax purposes and your child can
only deduct the interest paid if the loan is used to buy an income property.
4. Gift of equity
Have you thought of transferring your home to your child at an attractive price? Obviously, this decision means that you need to find another place to live. But if you’ve been thinking about moving out of your house into a smaller space, now’s the chance to help your child make the leap into the real estate market. Be careful! This alternative may incur tax costs if the transferred home is not subject to the principal residence exemption. Also, if your house is not fully paid for, a gift with charge is possible provided that your child assumes the mortgage. One interesting point: there is no property transfer tax to pay for a transaction between a child and parent (or related persons).
5. Help them improve their finances
Even if you cannot directly help your child due to your own financial situation, there are other ways to help out. For instance, your child could live with you after finishing their schooling. This way, they can start to accumulate a down payment. Share your own financial experience to provide valuable insights on how to build a solid credit score. Encourage them to reduce their debts and unnecessary expenses by helping them prepare a realistic budget.
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