According to a recent Global News article, 36% of Ontario buyers are getting financial assistance from family to purchase property. With first-time homebuyers receiving an average of $115,000 and move-up buyers receiving an average of $167,000.
While real estate prices have come down in pockets, GTA real estate is still unaffordable for most 1st time buyers. Move-up buyers are impacted as the spread of prices between housing types has widened. As an example as of the time of this article, downtown condos have dropped in price, but detached homes have maintained or even increased in many Toronto neighbourhoods.
One of the most common questions I get from clients is “Should I help my kids buy a house?”
This is a hot-button topic because parents want what’s best for their kids so they’re inclined to help. The question is what is the best way to help?
Mortgage Conditions For Today’s Buyers
While interest rates are dropping, it doesn’t mean it will be easier for young people to purchase a house they can afford. In 2024 the mortgage qualification process became more stringent with a reduction in the gross debt service ratio (GDS).
Banks used to make exceptions allowing people to borrow up to 50% of their income. This has now reduced to closer to 43%. This impacts the price point that your children can pay. This is to help protect people from becoming over-leveraged, so while a challenge for first-time buyers, it is a good thing in the long run, particularly given the recent interest rate spikes.
What Should You Consider Before Helping Your Child With Downpayment Money?
Relationship status: Is your child in a relationship? While gifting money to your child may be your first inclination. How would you feel if your child moves in with a partner and upon their split, needs to give them half of the money you gifted that was invested into their home? I always recommend that you consult a lawyer prior to entering into any agreements that involve money so that you and your child can be best situated going forward. It is always best to create contracts while everyone is “friends”.
One of my clients did not consult an attorney, and when his son split up with his long-term partner, she walked away with half the equity, despite having provided none of the down payment. In retrospect, he wishes they had structured their deal differently.
There are many ways to address this issue, I’ve seen structured loans with forgiven interest, I’ve seen tenants in common arrangements between partners and/or child and parent and cohabitation agreements between partners being used to protect assets. Your real estate lawyer can walk you through the pros and cons of each option.
Searching for more resources related to home-buying? Explore these related blogs and pages from my site!
- Should I Rent or Buy a Starter Home in Toronto?
- Browse Homes In Scarborough, Pickering, Ajax, & Whitby
Should You Go On Title?
Be wary of going on the title of your child’s property. You could be subject to capital gains tax and you could be on the hook if your child or their partner end up in financial hot water. The reverse also applies. I once had an investor client who purchased a house in their child’s name with the intent of flipping it. The build did not go as planned and they have compromised their child’s credit and future as a result.
I have another client whose parents cosigned on their child’s home, and when they were ready to purchase a new house, they were prevented from doing so because of their financial obligation to the other home. Their child was not yet in a position to be able to qualify for a mortgage on their own.
As I’ve said, a good real estate attorney is critical, but you may also want to speak with your accountant as well to understand your tax risks.
Why Help Your Child?
There are several reasons why my clients do so.
The rental environment in Ontario is very precarious.
Ontario has seen an uptick in renovictions and in evictions for purchaser and owner use as the current economic environment has put financial pressure on landlords. Evictions usually mean paying more rent and competition is fierce in the rental market. With escalating rents, saving for a down payment becomes very difficult.
My clients are trying to nudge their children out of the nest.
They have secure employment, but life is too comfortable at home. They may have gotten into the habit of spending the money they have. Having responsibility for home ownership will force them to be more diligent with their finances and build wealth. This also gives them the satisfaction and feeling of accomplishment that comes with being independent.
Parents plan to help their children as part of their estate plans.
Rather than pass along an inheritance after they are gone, they want to be able to use their accumulated wealth to help alleviate financial pressure and see their children thrive. It is satisfying to watch their children and grandchildren living a life they might otherwise have not attained on their own. Often this occurs when parents downsize and free up capital as a result.
How Much Will My Child Need?
The magic number people target for a downpayment is 20% of the purchase price plus closing costs. Anything below 20% requires insuring the mortgage, which is an added expense to a home buyer.
How You Can Help Them Help Save
Here are just some of the ways my clients have come up with downpayment money for their children:.
- Contributing to a First Home Savings Account(FHSA). Your child can use it to save up to a maximum of $40,000. You can contribute $8,000 annually tax-free for their first home, and it is tax deductible just like an RRSP but does not have to be repaid like the HBP.
- Contributing to your child’s RRSP. First-time home buyers can participate in the Home Buyers Plan(HBP). They can borrow up to $35,000 tax-free and they will have 15 years to pay this money back without penalties.
- Utilizing any available room in your Tax-Free Savings Account to set aside money for down payment help.
- Co-signing a mortgage.
- Downsizing or selling investment properties and using equity.
- Utilizing a Homeline.
- For working seniors, investing unutilized pension, OAS or RRIF payments into savings for their children.
Partner With the Right Real Estate Agent
Having a realtor with specialization and expertise in this area is invaluable. As a Senior Real Estate Specialist (SRES) I understand the nuances involved in such delicate circumstances. I share insight and provide advice so that my clients are empowered to make good decisions. Providing solutions for your specific situation helps you do what’s best for you and your family.
Have questions about helping your child buy a home? I can help. Get in touch with me at 647.283.2127 or send me email at stuart@stuartnodell.com.
Your Personal Market Guide
See how I simplify your real estate experience with personalized plans and total project management.
