Q: House prices have gone up so much in the last few years that I can’t see how my son will ever afford to buy. I wonder if it is wise for me to help him with a down payment.
You know this - parenting is a crazy thing. I spent days watching Youtube videos so I could create a “Taco” cake for my daughter’s 10th birthday. Who knew chopped up Girl Guide cookies would look so much like ground beef?
Parents are faced with an infinite number of choices, big and small, about what to do to raise good kids. There is what we could do, what we think we should do, what others think we should do, what we want to do, and then, finally, what we actually choose to do.
The choices, and angst over them, start the minute that little lump of happiness and heartache arrives. And, from what I have heard, it never really ends.
So. What to do about a down payment for your child? Here are some factors to consider as you ponder what is best for you, and what is best for them.
Don’t spend your retirement savings on their granite countertops
The first factor is whether or not you have the money to spare. If you have paid off your debts, and saved sufficiently for your retirement, the answer to the financial question might be yes. And you might be further compelled to take this step now so you can see your generosity enjoyed during your lifetime, instead of bequeathing it to them after your death.
But I have heard too many horror stories of seniors spending their nest egg on an adult child, such that they are stressed about their own future. Don’t do that. If you don’t have the money to spare, there are other options to help them fund a home: Consider loaning them the money at low (or no) interest, or co-signing on a loan, or even renting them your basement for cheap so they can save more aggressively themselves.
And remember that if you have more than one child you’ll also need to consider how to be fair to all your kids (or how to deal with the blowback if you’re not). There is more than a little peer pressure for parents to help kids with housing, but don’t succumb if you can’t afford it.
Stress test your child’s financial flexibility
The second factor to consider is your child’s financial circumstances. Does he have a job that will ensure he can pay for the mortgage, property taxes, insurance, maintenance and “surprises”. You want to be certain that he can carry this investment over the long term, without your help.
Also consider his relationship status, and possibly, factor that into the deal. Remember that if he divorces, half the equity in the house will go to his ex-spouse. If you structured your contribution to the down payment as a gift instead of a loan, that gets split too.
Pay attention to family dynamics
The third factor to consider is how this down payment will affect your relationship with your child. For some families, it is a continuation of a financial partnership that might have included a university education, a car or a wedding. Expectations were clear, and the agreements were drama-free.
For other families, contributing to a down payment on a home will light the match to a powder keg of emotions. There can be power plays, passive aggression, and aggressive aggression. Play this story out in your own family. Will you expect a standing invite to Sunday dinner and a veto on paint colours? Will they expect cash to pay for a leaky roof and weekend help raking the lawn?
Another intangible is the temperament of your child. If they haven’t been responsible with money in the past, a home can be a great way to force saving. Or, it can make them feel trapped and lead to additional stress. Talk to your son about what the responsibility of owning a home really means, and whether that will bring happiness or handcuffs.
Consult the professionals and document the deal
Discuss all of these factors with your child. The pros, the cons, and the what-ifs. Get the advice of a financial advisor, estate planner and an accountant. And know that you might ignore all that and make a choice blinded by your love for your child. It wouldn’t be the first time, that’s for sure.
If you do decide to proceed, be sure to document it all properly – update your will, draft a proper loan agreement if required, hash out some of the other less tangible expectations and write them down so everyone is on the same page.
Then buy them a bottle of something nice for the housewarming. You’re a homeowner. You know they’re going to need it.