An increasingly common wedding present request is not furniture or dishes but money toward the purchase of a home.
The Home Buyer’s Plan allows you to take out up to $25,000 from your RRSP to buy a home in Red Deer for the first time, though the money must be paid back in fifteen years. The Canadian Real Estate Association has asked for the withdrawal limit to be increased by $10,000 and include inter-generational transfers so that parents can take out the money to give to their children to buy their first home. The money could be given as a gift or as a loan. It is being touted by the CREA as a way to reduce the risk to lenders as well as the amount borrowed for the primary mortgage.
The Bank of Mom and Dad model of funding first home purchases can take several forms. One is the parents gifting money to their children. Some see it as a way to get their adult children out of the house so the parents can sell the home, downsize and even retire. Others see it as a way to start their adult children in life so they can start their own families.
In some cases, the parents help buy the home and legally own part of the home. If you’re taking this route, you should work with a lawyer so that the equity transfers to the child while simultaneously minimizing the taxes and paperwork. Or the ownership could be structured in a way where the parents’ stake is put in a trust for the benefit of the adult children. Do not just buy a house with your kids and then write off the amount as a gift or unpaid debt without talking to a legal or financial professional. If parents buy a home outright and then transfer it to their child, the act could trigger a tax on capital gains. Capital gains taxes will be owed on the increased value of the property at the time of the transfer whether or not parents expect the child to pay for the increased value of the house.
Some parents take things a step further. They may mortgage their own home, lending the money to their children at a lower interest rate than their own children could get on their own. Another tactic is parents cosigning the loan, becoming co-borrowers liable for the mortgage payments if their children fall behind. However, you should consult with a Red Deer Mortgage Broker before assuming a co-signer is necessary.
Sometimes the long-term vision is an intergenerational household. Parents may help adult children by a home with a secondary suite. It lets them have a great bedroom for teenagers in a few years while it is perfect for parents to move into in twenty or so years. In other cases, the house is bought because it has a garden suite / mortgage helper to be rented out to help pay the mortgage with the knowledge it could serve as a parent-in-law suite in the future if needed. In a few cases, it actually becomes an intergenerational, combined household at the get-go.
In markets like Vancouver, the laneway house or secondary house built on the market is built on the parents’ property for the adult children to live in. The cost of building a unit like this could be costly, but banks are working with families to come up with housing solutions. The secondary home cannot be subdivided from the initial home, but it increases the property’s value. And if the adult children move into another property, the parents can still rent the secondary home out for extra income. In other cases, the parents move into the secondary home while their children and their family move into the main home.