How to Help Your Adult Kids Buy Their First Home: Advice for Mom and Dad
As the Kelowna real estate market continues to climb, it is becoming harder and harder for the younger generation to buy their first home. With current prices in the Central Okanagan averaging over $700K for a detached house and a 2-bedroom condo starting at $200,000, getting on the property ladder isn’t easy.
Over the last few years, we’ve seen a trend – we call it the Bank of Mom and Dad. We probably wouldn’t be exaggerating if we said that more than 50% of our first-time Buyers are getting some form of help from their parents. This inter-generational transfer of wealth that we’ve been witnessing, as money transfers from Baby Boomers to Gen-X-ers or Y’s-ers, is changing the landscape of the Kelowna real estate market.
As a result, we have written this blog to guide you – Mom and Dad – to help your grown kids buy their first home. And don’t forget… not all help is financial, so read though this blog in its entirety if you want to help in non-financial ways.
There are lots of reasons why parents might decide to help their adult kids buy real estate:
- In expensive markets like Kelowna’s, getting a head start on the property ladder can make all the difference in the world. It allows these adult kids (let’s call them AK’s for short) to start building equity and benefit from increases in property values so that as they grew into bigger and more expensive homes, their equity has grown along with prices. Unfortunately, in Kelowna, it’s almost impossible to save fast enough to offset the increases in prices so as years go by, it becomes increasingly difficult to get into the real estate market.
- Many parents prefer to transfer their wealth to their AK’s while they’re still alive vs. waiting until after they die. Parents are increasingly choosing to give their AK’s help when they need it the most – during their 20’s, and 30’s when incomes are lower and costs to raise a family are higher, rather than later, when their AK’s are already retired.
- Parents who want to encourage fiscal responsibility in their kids know that forcing their AK’s to make a mortgage payment every month is one of the best forced savings options out there. And we’ve heard it feels a lot better to watch them build equity than blow their money at the pub.
- Another scenario is if an AK will be attending university in Kelowna. Sometimes it makes more sense for the parents to buy a property rather than pay their kid’s rent for four years. Why pay someone else’s mortgage when you could be paying your own? We often see parents buying 2-bedroom condos near the universities so their AK can still have the roommate experience and the room-mates rent can helps offset some of the costs.
- Estate Planning: As part of their estate planning, some parents may choose to invest in real estate in their AK’s names to reduce estate taxes. Sometimes, it’s a matter of wanting to help your kids qualify for a bigger mortgage that they could on their own.
Here’s what you need to know if you’re thinking about helping your AK buy a house or condo in Kelowna:
Co-signing the Mortgage
If you’ve decided to co-sign the mortgage, you’ll also be on title, so the good news is that you don’t just take on the liability, you take on the asset too.
The lender will take into account your credit history and income, and you’ll need to qualify for the mortgage the same way your AK will. You’ll be fully responsible for re-paying the mortgage should your AK not make payments. If they’re late with payments, your credit rating may be affected. Make no mistake about it, this is your mortgage too, and your lending ability will be reduced by the amount of the mortgage.
The government may consider this to be an investment as you aren’t living in the home, and you could be subject to capital gains when your kid sells. Talk to your lawyer and accountant about ways to avoid this.
Contributing to the Downpayment
This is probably the most common way that parents help their AK’s and we’ve seen everything from $5,000 contributions to $250,000+ contributions. If you’re thinking of helping fund the downpayment, make sure to:
- Outline your expectations in advance. Is this a gift? Is it a loan? If it’s a loan, make sure to outline the payment terms and expectations.
- Consider the what-ifs. Specify what you expect to happen to the equity you’ve contributed if your child gets a common-law partner, gets married or divorced. We’ve seen this go ugly on more than one occasion.
- Give them a gift letter. The lender will require this to account for where the downpayment is coming from. Also, note that the funds will need to be in your AK’s account a minimum of 2 weeks before the closing day and that the lender will call to confirm the gift is not, in fact, a loan.
If you’re unsure how much to contribute, consider helping them get below one of the CMHC thresholds. CMHC is the insurance lenders require if the downpayment is less than 20% and it works on a sliding scale. If you can help your kids get to 10% from 8%, that could be a huge savings for them in CMHC insurance. Better yet, help them get past the 20% threshold and they can avoid paying CMHC insurance entirely.
If you decide to help your AK financially, the worse kind of interest to charge is GUILT. So challenge yourself NOT to judge their future spending decisions – even if it’s a trip to Cuba or a new car that you wouldn’t justify for yourself. Misguided generosity intended to control is worse than no generosity at all.
Don’t make your AK’s hire your great-uncle Mike, who works in the boonies and is intimidated by driving in downtown Kelowna. Your AK’s will make much better decisions if they’re working with a REALTOR, who is experienced in the neighbourhoods and buildings they want to buy in, and someone who can relate to their lifestyle and the kind of property they want to buy.
Keep in mind: buying a home in Kelowna today might be different than what you remember or how real estate happens in your city. Educate yourself on current local norms and trust the experts.
Whatever you decide to do, do it in writing. The last thing you want is for your attempt to help to backfire and cause strife in your relationship.
So should you help your adult kids buy real estate in Kelowna? If you have the means and desire, then by all means do it… but do it smartly. And if you don’t or can’t- that’s OK too. Helping your grown kids buy a home is by no means a parental obligation!
Have questions? Want to know more? We’ve helped navigate the parental/adult kid real estate purchase more times than we can count. We’d be happy to help.