The recent property bull market in Vancouver has been great for home-owners. It has however created a gap in housing affordability and attainability for the next generation. As it stands, many millennials are struggling to make it onto the first rung of the property ladder, and the bank of Mom and Dad is quickly becoming the only option for financing availability. There are a number of options available that can help you to guarantee a mortgage for your child, however, they do have inherent risks and considerations to take into account.
I Want to Help My Kids Buy a Home- What Are My Options?
With higher property prices and restricted rates of lending, obtaining a first home can be an arduous task. Many parents wish to help their children through the process, whether that is through financing, lending, or using their own funds/liquidity to finance a purchase.
When it comes to securing a mortgage for your child, you have a number of options available to you. Some may be more suitable for your circumstances, and all of the options have their own pros and cons, which we’ll cover in more detail.
1. Loan Your Child the Money
The first and probably most obvious option to help your kids purchase their first home is to loan them the money.
A loan agreement with your child can be as simple as a conversation over the dining table, however, depending on the reliability of your children, it may serve better to have the agreement formalized in some way.
In doing so you are able to set an interest rate (this figure is up to you) and clearly stipulate the terms of your loan and agreement.
It’s important to understand that if you formalize the loan, you would have to declare any interest on your tax return. Moreover, depending upon the size of the loan, it is likely that your child would have to pay mortgage lenders insurance, as part or all of the downpayment has been borrowed.
Furthermore, although this may be the most accessible option to help your children, it is also creating another debt load, which may work against them if they need to apply for a mortgage for the remainder of the property value. If you have the liquidity available to finance the entire purchase, however, giving your children a loan to help guarantee a mortgage for them could become a viable option- provided you trust them enough to pay you back!
2. Gift Your Child the Money, or the Property
This is probably the easiest and cleanest way you can finance a property purchase for your children. Although it may not be an option to gift the entire amount, for most situations gifting the money often makes the most sense from a:
Tax perspective
There are no tax consequences for gifting the money. If you are providing the 20% downpayment (or more) it will guarantee your child a mortgage whilst avoiding mortgage lenders insurance. In addition, gifting the money to your children can help to avoid probate fees, if you planned to hand it over upon your passing anyway.Legal perspective
Once gifted, that money is no longer your property, nor can you be held liable for anything it is used for.
Gifting a property in and of itself is also an option, however, you may incur a capital gain if the properties fair value at the time of the ‘gift’ is more than what you paid for it.
3. Co-Sign or Guarantee a Mortgage
Both of these options will see you accept some form of liability on behalf of your children.
Becoming a co-signer to the mortgage adds your name to the title of the property, meaning that you are also a co-owner. As a co-owner of the property, you are equally liable to ensure that repayments take place. This could also put your financial future at risk should you need a loan of your own, as you may now be considered a higher risk.
It can, however, become a good investment opportunity for both you and your child, if the property value appreciates over time.
Becoming a guarantor means you are guaranteeing payment of the mortgage in the event that your child cannot. In most cases, this will use your own property equity, or take into account your other financial instruments or assets, as collateral. This also means, however, that any default will negatively affect your own credit scores too.
So Can I Guarantee a Mortgage for My Child?
The short answer is yes. The methodology for guaranteeing your child’s mortgage, however, will be dependant upon your family circumstances.
Loaning your child money, whether it is formally or informally, can open their access to financing that may otherwise be unavailable.
Gifting a downpayment may allow your child to avoid mortgage lenders insurance, claim the first homebuyers grant, and claim the primary residence exemption (freeing them from future capital gains on the property).
Co-signing or becoming the guarantor means you assume some liability and responsibility for the property, and access to finance will take into account your own financial situation.
Before committing to any of these options, however, it’s also important to ask yourself some of the tough questions:
If your child hasn’t saved enough for a downpayment, will they be able to make their mortgage repayments?
Will their debt-to-income ratio allow them to access finance for the remainder of the purchase?
Are you over-extending yourself by co-signing the mortgage, or guaranteeing the loan?
Will money become a point of contention?
If you have accounted for these potentialities and are looking for the most appropriate way to guarantee a mortgage for your child, speaking with a licensed Realtor can help you to understand the property risks and state of the market, and put you in touch with their network of brokers. For more information about financing, or helping your kids to find the right property, reach out and connect with us!