August 22, 2014
Bank of mom and pop
More and more young homebuyers are entering the market with financial help from their parents
BY MICHAEL BERNARD
With the average sale price of a condominium running as high as $400,000 in Metro Vancouver this year, it’s no surprise that young people are increasingly relying on the “Bank of Mom and Pop” to buy their first home. While statistics are scarce, two recent surveys confirm what realtors are finding in their show suites – more and more parents are gifting and loaning money or becoming co-investors to help pole-vault their kids into what New Yorker magazine recently labelled “the most expensive housing market in North America.”
Most parents simply write a cheque to boost their kids’ down payment
Condo-king Bob Rennie told an Urban Development Institute lunch in May that his company’s survey found that 40 per cent of first-time buyers among 3,700 people surveyed received help from parents and grandparents for deposits and down payments. BlueShore Financial (formerly North Shore Credit Union) found the same percentage of 350 Lower Mainland members surveyed bought their first homes with financial help from parents.
“We see parents involved more and more in helping their kids buy their first home,” says Scott Brown, president of Surrey-based Fifth Avenue Real Estate Marketing. “A limited number – about five per cent – come to our show suites to see if they can find something for their kids, but mostly they get involved when it comes to closing the sale.” Most parents simply write a cheque to boost their kids’ down payment, almost always the biggest hurdle to buying a first home. That’s what westside realtor Colette Gerber did to help her two daughters buy their first homes, most recently this past summer.
“[My daughter] Natasha is just one of many young people who have decided it is cheaper to buy than it was to rent, but raising the money for a down payment was extremely difficult,” said Gerber. While newlyweds Natasha and husband D’Shawn didn’t ask for the help, Mom gave them 25 per cent of what they needed for a down payment. “It’s a gift given out of love with no strings attached,” said Gerber, adding she believes “it would be counter-productive to the relationships” to put conditions on the money. In the end, it is their money and not mine.”
They were looking to make monthly payments equal to the $1,650 rent they paid for their two-bedroom Langley Gardens apartment in south Vancouver. “We kinda expected that the cost of real estate would surpass what we could afford but still had the hope that we could live [in Vancouver],” said Natasha, 25. After checking out at least 25 different units from Burnaby to New Westminster, the couple opted for a spacious 940-square-foot, two-bedroom condo in a 20-year-old building three blocks west of Burnaby’s Brentwood Mall for $289,000.
Giving cash is not the only way parents can help their children
While they considered condos with less space in Vancouver, size was important. “If we have children, we don’t want to necessarily have to move,” said Natasha, who just started a job at a financial institution in Vancouver’s Kerrisdale neighbourhood. Giving cash isn’t the only way parents can help their kids, says Ryan McKinley, Vancity’s senior mortgage development manager. They can give the kids a loan, guarantee the mortgage or even invest in the property themselves. “We work with individuals and families to try to find the right situation for them. In recent years, we see more and more parents investing with their children rather than just giving them a lump sum.”
Lending the money can actually have some drawbacks. If the parents require regular repayments, then Vancity or any other lender must take that into account and reduce the total amount the kids can borrow. When the goal is meeting a minimum down payment or keeping below a certain monthly payment, that reduction can be a deal-breaker. McKinley says parents often are concerned about what happens to the property if their son or daughter’s short-term relationship with someone falls apart. He suggests they may want to consult a lawyer about drafting a co-habitation agreement, setting out who owns what from the beginning and what happens to those assets if the relationship fails. Parents can also register a second mortgage, which effectively lays claim to any equity left after the mortgage is paid.
With deposit accounts earning low returns, more parents are choosing to invest in real estate alongside their kids. “If parents are looking to diversify their investment portfolio, then owning a half or a quarter of a home could be part of their investment strategy,” McKinley said. Of course parents can make it easy for themselves by getting a head start on the whole process, as BlueShore Financial CEO Chris Catliffe did to help his two teenagers.
“I’ve done it early,” he said. “They are only 20 and 16 and I’ve bought them a couple of rental condos. Eventually they are in a position where they could move into them.”
TIPS FOR PARENTS
Advise your children to:
- Get in writing a mortgage pre-qualification from a broker or financial institution to set a realistic purchase price and to avoid last-minute rejection of an offer
- Avoid buying at the top of the price scale so they still have money for entertainment, vacations, etc.
- Develop a list of reasonable and realistic “must haves” such as ensuring the new home is close to transportation, grocery stores, gyms, etc.
- Seek the parents’ knowledge and help in defining areas suitable or not suitable for homes.
Colette Gerber, realtor