How can I help my son or daughter buy their first home?

There are lots of reasons parents offer to help an adult child buy their first home. Some parents find it makes sense to buy a place for their child to use while they are away at university or college.

For other parents, it's about helping a child get off to a good start in their adult life. Buying a home can be one of the most stressful and costly purchases their son or daughter will ever make. It can take years to save up a down payment.

If you are considering a plan to help your child with their first home, there are a number of ways you could proceed. We'll look at three options here:

  • Loan your child the money to buy the home.
  • Co-sign a loan.
  • Pay some or all of your child's costs as a gift.

Loan your child the money to buy a home

With this plan, you could charge your child the same or higher rate of interest than what you would get if you left the money in your bank account. To give them a break, you could set the rate lower than your child would pay on a real mortgage.

Things to consider:

  • You have to declare the interest you earn on your tax return.
  • In the eyes of the Canada Mortgage and Housing Corporation (CMHC), a loan from you is not as good as your child's own cash for a down payment. This means your child won't qualify for the normal CMHC insurance rate on their mortgage. They will have to pay a surcharge.

Co-sign a loan

Here you agree to add your name to your child's mortgage. This can seem like an easy way to help your son or daughter out. And it could be, if everything were to go as planned. But there are a number of reasons you may be better off finding another way to help.

Things to consider:

  • It tells the bank that your child's income or credit rating is not good enough to qualify on their own.
  • If you already have a mortgage on your own home, you and your child would not qualify for a high-ratio mortgage. Together, you would have to pay 20 per cent down. On his or her own, your child could pay as little as 5 per cent down.
  • You will be liable for the mortgage payments if your child defaults.
  • Your name will be on the title of the property. That means if something goes wrong, you will legally have to share the responsibility. Check with a lawyer about the implications.

Pay some or all of your child's costs as a gift

Some parents give their children a down payment on a home as a gift. Or, they may pay the monthly mortgage costs. Some parents can give their children enough money to buy the home outright. You can gift any amount of money to your child. There is no tax on cash gifts in Canada.

Things to consider:

  • If it's a gift you plan to leave your children in your will anyway, you will save them from paying probate fees after your death.
  • It's one thing to give cash as a gift. But if you buy a home and then give it to your child as a gift, it's as though you sold the property to them at fair market value. So if the house is worth more than you paid for it at this time, you will have to pay tax on any capital gain.
  • Think carefully about gifting money to a child to buy a home when they are getting married. If the marriage ends, the two parties would split any equity in the home. It doesn't matter that you gave it as a gift to your child.
Did you know? 10 per cent of Canadians are considering buying a condominium for their adult children. That's up from 5 per cent just a year ago.

Remember: There are many ways to help your child buy a home.
But first ask yourself if you can truly afford to do it. Don't take on debt to help your children out. Also make sure you are on track with saving for your retirement.

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