BMO Bank of Montreal found that up to 40 per cent of their first-time buyers expect some family help to get on the property ladder. Vancouver Sun reporter Derrick Penner sought some expert advice on how parents can approach the situation.
Q: How can I help my child buy her first home?
A: It can be as simple as co-signing on the mortgage to help a child who has saved some money for a down payment, but still can’t meet all the qualification requirements, said Richard Bell, a real estate lawyer with Bell Alliance Lawyers and Notaries Public in Vancouver. Or, a parent can offer a gift of cash.
Q: How do I go about gifting money to my daughter to help her make up the down payment on her first home?
A: You will need to write a letter of gift, specifying that you don’t expect the money to be paid back, as part of the mortgage application, said mortgage broker Michael James of DLC Mortgage Evolution in North Vancouver. And for any gift over $5,000, he added, that banks will want to see a clear history of where the money came from.
Q: What do I need to consider if she isn’t married but living in a common-law relationship, to protect the gift if that relationship ends?
A: One way of making sure the gift stays with the daughter, as intended, is to register an equitable charge after the first mortgage that stipulates there can be no change in title without the parents’ agreement, James said. However, whether parents can do that depends on how big the gift is. Bell said that banks generally don’t like to see such charges on title, but will allow parents to register a second mortgage, so long as a portion of the funds are offered as a gift in the down payment. He recommends drawing up an agreement, similar to a pre-nuptial agreement, to make sure such gifts aren’t split up along with other assets when a relationship ends.
Q: What are the tax implications of offering my child a gift of money for a down payment?
Gifts of cash to help a child have to be your own after-tax dollars, Bell said, so there are no tax implications to you.
Q: How much should I give?
A: That is completely up to your individual financial situation, but there are advantages to helping a son or daughter maximize their down payment beyond the obvious injection of equity that reduces a buyer’s interest payments over the life of their mortgage. Using the example of a home that fits into the maximum exemption from the property-transfer tax for first-time buyers, $475,000, the minimum down payment of five per cent would be $23,750, which is a difficult sum for young buyers to come up with. However, if parents can help get a son or daughter to 20 per cent, that changes their financial picture by eliminating their need for mortgage insurance — a savings of thousands of dollars in premiums — and qualifies them for a longer amortization, which helps ease monthly cash flow.
Q: How do I go about buying a home outright for my children?
A: There are different scenarios, said Bell. A common arrangement is for the parents to fund the purchase, but register a mortgage against the property in their favour to secure the asset, especially where cases involve a common law relationship. However, he said that is becoming more difficult under new B.C.’s new legislation governing the break up of such relationships.
Q: What are the tax implications of an outright purchase?
A: Again, even if the son or daughter is repaying the mortgage, as long as the parents don’t expect repayment with interest, there are no tax implications to the parents.
Q: How do I co-invest in a home with my daughter and spouse in a case where I plan to live with them?
A: A parent can join in the purchase using a joint tenant agreement, which would allow the child and spouse to slowly take over the title, or allow the property to pass on probate free to the remaining tenants in the event of the parent’s death, James said. This can help young buyers meet both the down payment and income requirements, he said. Ownership can be structured so that the child and spouse can take full advantage of property-transfer-tax exemption for first-time buyers (and the parents don’t take a property-transfer-tax hit). However, James cautioned, the parent can wind up with a big debt liability if the children can’t keep up their end of the payments.
Q: Should I remortgage my own home to come up with the money to help my children?
A: Bell said that scenario does happen, but it is very uncommon and comes with considerable risks. Some parents will do it if their son or daughter needs a little bit of help; otherwise, it raises the prospect of taking on a big debt close to retirement.