Your Kids’ First Home: A Parent’s Guide
April 23, 2014
Buying a house is an exciting life milestone, especially for the first-time homebuyer. As a parent, this can be an incredibly rewarding time as you see your not-so-little-one leave the nest or transition from renting to home ownership. Like any good parent, you’re there to support them with wisdom and experience. But what about supporting them financially?
To offer financial help or not? That’s the question that many parents grapple with. Increasingly tight borrowing restrictions and a sluggish job market (especially for the Millennial crowd) means first-time home buyers may not have the full down payment and closing costs saved and parents are tempted to chip in a little (or a lot) when it comes time for the big purchase.
Before handing over a cheque, there are some factors to think about first. “It’s important to make sure that parents understand the impact on their own financial situations. By helping their kids, parents may be compromising cash flow, retirement plans or credit rating,” explains Therese Hibbs, Lending Specialist, Libro Credit Union. “That’s why we like to take the time early in the process to meet and go over the financial plan and consider all the factors.”
Sometimes the best intentions can lead to financial or even emotional strain so take the time to make sure that whatever the arrangement, both you and your adult child are on a path to life-long financial (and emotional!) well-being.
Following are some options parents can consider:
A cash gift is the simplest way to help and there are no tax implications for either party. If this is your plan, wait until a budget has been set for the purchase before offering assistance. This will prevent your contribution from creating the temptation to spring for a more expensive house than can realistically be afforded.
The gift can be any amount within your comfort zone. The gifted money can top-up a down payment to meet the 20% minimum needed to avoid mortgage insurance fees as required by the Canadian Mortgage and Housing Corp (CMHC) for smaller down payments.
Co-signing uses your good name and positive credit score to help your child secure a first mortgage. But remember, if you’re a co-signer on a loan (mortgage or otherwise) you are equally responsible for that loan whether you’re the one paying it down or not. If payments stop, you’re on the hook for repayment as well as the resulting credit rating repercussions. Before making the decision to co-sign, make sure you’re prepared financially to take on the loan and everyone involved understands the risks.
3. Parental Loan
A parental loan may provide your child with a more flexible repayment option. Your child gets the assistance he/she needs, and you eventually get your money back. On the other hand, a second loan increases the homebuyer’s debt obligations. If you’re considering this option, you should review a detailed budget with your child to ensure he/she can live comfortably and keep up with commitments.
On a final note, money is not everything; there are other ways you can contribute. Why not put your master gardening talent to good use, or lend a hand with a new paint job? Or strong support can come in the form of solid financial advice, not just cash.
Whichever path you pick it needs to be the right one for you. Contact your Libro Coach for more information.
Applications now available for Community Builder Grants!
Do you need help bringing a youth-focused project to life? Libro is accepting applications for Community Builder Grants that will help youth develop leadership and career skills. In 2014, there is approximately $560,000 available for projects across southwestern Ontario where youth under the age of 25 play a pivotal role. Learn more about how Community Builder is supporting local youth and communities
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