As Toronto real estate market prices continue to climb, it’s become harder and harder for the younger generation to buy their first home. With current prices in Central Toronto averaging over $1.3 million for a detached house and starting at $400,000 for a condo (bachelor pad under 500 sqft with no parking), getting on the property ladder isn’t easy.
Over the last few years, we’ve seen a trend – we call it the Bank of Mom and Dad. I probably wouldn’t be exaggerating if I said 60% of our first-time Buyers now have some form of help from their parents. We’ve seen a lot of tears (some of them happy), and we’ve witnessed our fair share of It-Feels-Like-Thanksgiving fighting. This inter-generational transfer of wealth that we’ve been witnessing, as money transfers from Baby Boomers to Gen-X-ers or Y’s-ers, is changing the landscape of the Toronto real estate market.
We’re written this blog to guide you – Mom and Dad – to help your grown kids buy their first home. And don’t forget….not all help is financial, so read on to the bottom if you want to help in non-financial ways.
There are lots of reasons why parents might decide to help their adult kids (we’ll call them AK’s for short) buy real estate:
- In expensive markets like Toronto’s, getting a head start on the property ladder can make all the difference. It allows AK’s to start building equity and benefitting from increases in property values so that as they grew into bigger and more expensive homes, their equity has grown along with prices. Unfortunately, in Toronto, it’s almost impossible to save fast enough to offset the increases in prices so as years go by, it becomes increasingly difficult to get into the real estate market.
- Many parents prefer to transfer their wealth to their AK’s while they’re still alive vs. waiting until after they die. They choose to give their AK’s help when they need it the most – during their 20’s, and 30’s when incomes are lower and costs to raise a family are higher, rather than later when their AK’s are already retired.
- Parents who want to encourage fiscal responsibility in their kids know that forcing their AK’s to make a mortgage payment every month is one of the best forced savings options out there. And I’ve heard it feels a lot better to watch them build equity than blow their money at the pub.
- It might make financial sense if an AK will be attending university and the parents would rather buy a property than pay their kid’s rent for four years. Why pay someone else’s mortgage when you could be paying your own? We often see parents buying 2-bedroom condos near the universities so their AK can still have the roommate experience and their rent helps offset some of the costs.
- Estate Planning: As part of their estate planning, some parents may choose to invest in real estate in their AK’s names to reduce estate taxes.
- Sometimes, it’s a matter of wanting to help your kids qualify for a bigger mortgage that they could on their own. [Related: Should You Buy Your Second House First?]
Here’s what you need to know if you’re thinking about helping your AK buy a house or condo in Toronto:
Co-signing the Mortgage
If you’ve decided to co-sign the mortgage, you’ll also be on title, so the good news is that you don’t just take on the liability, you take on the asset too.
- The lender will take into account your credit history and income, and you’ll need to qualify for the mortgage the same way your AK will.
- You’ll be fully responsible for repaying the mortgage should your AK not make payments. If they’re late with payments, your credit rating may be affected.
- Make no mistake about it, this is your mortgage too, and your lending ability will be reduced by the amount of the mortgage.
- The government may consider this to be an investment as you aren’t living in the home, and you could be subject to capital gains when your kid sells. Talk to your lawyer and accountant about ways to avoid this.
Contributing to the Downpayment
This is probably the most common way that parents help their AK’s and we’ve seen everything from $5,000 contributions to $250,000+ contributions. If you’re thinking of helping fund the downpayment, make sure to:
- Outline your expectations in advance. Is this a gift? Is it a loan? If it’s a loan, make sure to outline the payment terms and expectations.
- Consider the what-ifs. Specify what you expect to happen to the equity you’ve contributed if your child gets a common-law partner, gets married or divorced. We’ve seen this go ugly on more than one occasion.
- Give them a gift letter. The lender will require this to account for where the downpayment is coming from. Also, note that the funds will need to be in your AK’s account a minimum of 2 weeks before the closing day and that the lender will call to confirm the gift is not, in fact, a loan.
- If you’re unsure how much to contribute, consider helping them get below one of the CMHC thresholds. CMHC is the insurance lenders require if the downpayment is less than 20% and it works on a sliding scale. If you can help your kids get to 10% from 8%, that could be a huge savings for them in CMHC insurance. Better yet, help them get past the 20% threshold and they can avoid paying CMHC insurance entirely.
Loaning your Adult Kids the Money
With interest rates so low these days, we don’t often see parents paying cash for their AK’s properties, but it does happen. In this scenario, the AK doesn’t need to qualify for a mortgage, so their past credit history and income aren’t relevant. Parents who lend their kids 100% of the money can set the payback terms any way they choose. Of course, there’s risk involved in this scenario, and you’d be well advised to draw up a contract outlining everything.
Co-buy a Property with your Adult Kids
If you want to help your AK buy a home but also want to have your money working for you, consider co-buying. When co-buying, you and your AK contribute a % of the downpayment and you share the carrying costs. When it comes time to sell, you share any increase in value (or share the pain of a decrease in value). When determining the proportions, make sure to take into account if your AK is benefitting by living there and if they’re contributing by maintaining the property. As always, it’s a good idea to figure out exactly how everything will work, so there aren’t issues at the other end.
If your AK is selling their current home and upgrading to a different one, they could benefit from bridge loan assistance. This can be especially helpful if their new mortgage is conditional on having their old property under contract by the closing date. Having a Plan B for short-term financing in the event that the property doesn’t sell in time, will save them countless sleepless nights and ensure they don’t have to have a fire sale. The best part about helping with bridge financing: it’s just a short-term loan and you don’t have to part with your cash for long – and in the event that their current home sells, you won’t have to part with any money at all.
Within 24 hours of having their offer accepted, your AK will need to provide the Seller’s brokerage with a deposit (which then forms part of the downpayment come closing time). What’s considered a “normal” deposit fluctuates wildly across Ontario – in Toronto, it’s usually at least 5% of the purchase price. Because most first-time Buyer’s down payment is stuck in RRSP’s and aren’t liquid, it’s not always easy for your AK to come up with that 5% in 24 hours. Here’s where you come in. By loaning them the cash for the period before closing (say, 60 or 90 days), you’re providing a huge help – and you actually get paid back on closing day!
Help with Closing Costs
When I bought my first property at 27 years old, my parents loaned me the money for the closing costs. Because land transfer taxes and legal fees can’t be added to the mortgage, I was barely able to scrape together the downpayment and that extra injection of cash made all the difference. I dutifully made repayments for two years until one Christmas when they wrote off my debt. It was an unexpected and most appreciated surprise. Thanks, Mom and Dad, if you’re reading this!
I Want to Help but I Don’t Have the Money!
Don’t worry if you can’t financially contribute to your AK’s property purchase, you are far from alone. There are still plenty of ways you can support your AK’s purchase of a house or condo:
- Lend your experience to their house hunting: warn them about what to look out for when touring houses and share with them the lessons you’ve learned from home ownership.
- If you’re handy: every AK will jump at the chance of getting your help around the house, from minor fixes to painting to more involved renovations. Thanks again Dad for painting every home I’ve ever lived in!
- Be available when something goes wrong…you’ve probably owned a house for a long time so you can probably help diagnose the problem when there’s no water coming out of the taps, the toilet is overflowing or water is coming in from the ceiling. A friendly voice at the other end of the telephone can make this part of home ownership less stressful!
- Contacts: If you live in the same city, connect them to your trusted home resources, your electrician, your plumber, etc. – they’ll appreciate it when something goes wrong.
- Help with the move or the post-move clean. I know, everybody hates doing this, but you changed their diapers for years and moving is better than that.
Other Things to Keep in Mind:
If you decide to help your Adult Kids buy their first home, keep the following in mind:
- Set out expectations: Make sure you outline how involved you want to be in the process before the house hunting begins. Do you want to attend every showing? See the final pick before they make an offer? Be part of the negotiations? Review the paperwork? Or are you happy to let them make the decision on their own?
- If you decide to help your AK financially, the worse kind of interest to charge is GUILT. So challenge yourself NOT to judge their future spending decisions – even if it’s a trip to Cuba or a new car that you wouldn’t justify for yourself. Misguided generosity intended to control is worse than no generosity at all.
- Don’t make your AK’s hire your great-uncle Gerry, who works in the boonies and is intimidated by driving in downtown Toronto. Your AK’s will make much better decisions if they’re working with a REALTOR, who is experienced in the neighbourhoods and buildings they want to buy in, and someone who can relate to their lifestyle and the kind of property they want to buy.
- Keep in mind: buying a home in Toronto today might be different than what you remember or how real estate happens in your town. Educate yourself on current local norms and trust the experts.
- Whatever you decide to do, do it in writing. The last thing you want is for your attempt to help to backfire and cause strife in your relationship.
So should you help your adult kids buy real estate in Toronto? If you have the means and desire, then, by all means, do it…but do it smartly. And if you don’t or can’t- that’s OK too. Helping your grown kids buy a home is by no means a parental obligation!
Have questions? Want to know more? We’ve helped navigate the parental/adult kid real estate purchase more times than we can count. We’d be happy to help.