Thinking you might like to help your kids buy their first home?
Abigail Van Buren once said, “If you want children to keep their feet on the ground, put some responsibility on their shoulders.”
This holds true even once they’re grown. You may have been thinking that you would like to help your kids become homeowners, perhaps for this reason, or simply because buying that first home has become more challenging and you’d like to give them a hand up.
Once your kids are old enough to go to university or first start working, they might not have the funds to buy their own home, yet many of us feel that it is better to own the home we live in, rather than paying off someone else’s mortgage. So, how can you do it?
3 options to consider
Which of these works best for you depends on your financial situation, and your lifestyle and retirement goals.
Option 1. Provide cash to your kids as a gift, for a down payment on a home.
PROS: Your kids can buy a home sooner, and start building up equity, rather than paying rent to someone else. If the amount of the gift is more than 20% of the value of the home they wish to buy, you enable them to obtain a conventional mortgage, avoiding the costs of a high ratio mortgage.
CONS: You will have to provide a letter confirming that the funds are a gift, with no repayment required. The child is free to use the money as they choose.
Option 2. Co-sign on their mortgage.
PROS: The mortgage will be obtained based on your financial circumstances. Your kids may not have an established credit rating, high enough salary, or a proven track record of employment, to qualify for a mortgage. If your financial situation allows, you can co-sign or guarantee their mortgage.This may result in a better interest rate, larger mortgage amount, and a more ideal home for them.
CONS: You will be responsible for paying the mortgage, if your children become unable to do so. As well, if you later need to borrow money yourself, the debt may impact your own ability to qualify for funds. Discuss this with your mortgage broker.
Option 3. Use your own cash, or equity you have available in your own home, to buy a home and have your kids pay you rent.
PROS: If you feel your kids are not yet ready to own their own home, for example, while going to university, becoming the landlord may make the most sense. Using money you have in the bank, or equity in your own paid-off home, you could invest in a rental property. If you do finance the purchase, your interest on the loan is tax-deductible since this is not your primary residence (and if you choose a home equity line of credit, all you have to pay is the interest). Best of all, your children and their roommates will pay the rent to you, keeping the money in the family.
CONS: If you finance the purchase, the equity in your own home will be tied up and not available to you for your personal needs. The same holds true of you use your own funds. Also, if your children move away, you might be stuck holding property in an area that was chosen only because your kids were attending school there.
The key benefit if you help kids buy a home
The help you have provided will keep money in the family, instead of paying someone else’s mortgage via rent payments. Talk to a good mortgage professional, as well as your accountant or financial planner, to review your options and ensure they are appropriate for your situation, and then enjoy helping to make your children homeowners! If you’d like to chat with me about your options, don’t hesitate to get in touch!
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