October 13, 2017

Mortgage Matters: A family affair

What parents need to know before helping their children with a home purchase

By Kevin Lutz

First- and next-time homebuyers continue to face affordability challenges when it comes to buying a home. With prices on the rise in B.C. and new mortgage insurance regulations being introduced, homebuyers are facing further constraints when it comes to affordability.
Did you know that across Canada, up to 45 per cent of homebuyers receive financial help from their relatives and 57 per cent of first-time homebuyers are likely to ask a family member for home-buying advice? Clearly, home buying is often a family affair.
If you’ve been through the home-buying and upsizing process yourself, it may be the right time to share your experience and insights with your child. The type of help your child needs will depend on where they are with their home-buying journey and the decisions that they’ve already made. Your assistance may include helping them determine what to look for in a home, setting realistic goals and budgets, and perhaps providing financial help.
Buying a home can be complex. You can help your child achieve home ownership in a number of ways. Here are some of the things to consider sharing with your child:
• The home-buying budget, including closing costs, legal fees, land transfer tax, etc.;
• The monthly costs of home ownership, including utilities, property maintenance, property taxes, etc.;
• The source of their down payment, which can include using funds from an RRSP or a TFSA;
• The size of the down payment and its impact on mortgage insurance costs and mortgage carrying costs;
• Decisions relating to an appropriate realtor, the size and type of property, plus other considerations such as buying freehold vs. a condo;
• Giving your child a “gift” for their down payment.
With the price of homes continuing to rise, it could take years before your child has enough money saved for a down payment. With this in mind, gifted down payments are becoming more common for parents of first-time homebuyers. It’s very simple: All you need to do is sign a Gift Letter, which your mortgage specialist can provide to you. The letter must state that the money does not have to be repaid and you’ll need to show that the funds were deposited into their account no later than 15 days prior to closing.
Tip: When parents assist with a down payment, it’s important to clarify in writing whether it’s a gift or a loan. An outright gift does not need to be paid back, whereas a loan requires a more formal definition of the terms of the arrangement, including interest rates and the timing of payments. An additional advantage of a gift is that it is not counted towards the recipient’s capacity to pay their mortgage.
Another way to help your child is by co-sharing a property with them. If you’re thinking of buying a home with your son or daughter, there are many particulars to decide on beforehand. You’ll need to decide exactly how you’re going to split the cost of the down payment, whether the mortgage payments will be split as well, and who will be in charge of making sure all the other monthly costs, such as utilities, are paid on time.
If you would like to help your son or daughter by co-borrowing with them, your combined income would likely help them qualify for a larger mortgage, which opens up a greater choice of homes. And . . . maybe there’s room for an in-law suite? Your income and credit history will be used to qualify for the loan, and all applicants’ names will appear on the property’s title.
Is co-borrowing right for you? It’s important to take the time to speak to the appropriate legal and financial advisors to iron out the details and ensure your agreement covers all possible outcomes. You’ll need to think about potential buyouts, what happens if one of you gets sick or laid off, and how long you wish to share the property. Don’t forget that changes in ownership could trigger capital gains taxes.
There are numerous options available for families to help the next generation buy a home. A financial advisor can help you weigh the pros and cons of different scenarios and choose the best one. When it comes time to buy, your mortgage specialist can provide the expertise and guidance you need to ensure you’re making the right decisions.

Kevin Lutz is RBC Regional Sales Manager,
Residential Mortgages

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