Prices and interest rates rising
With prices way up, it will be a real challenge for the next generation to buy a house. Here’s the problem: A house that cost $400,000 two years ago is now going for $500,000. And the mortgage then costing 2.8% is now priced at 7.1%. So, the down payment has increased by $25,000 and the monthly payments are up 14% from $1,298 to $2,779. This is a big stretch for a young couple. The lull in the housing market will help a little bit. But the increase in mortgage interest rates will raise the challenge even more. What can you do to help?
The new First Home Savings Account (FHSA), explained further down, can help, especially if two partners are buying together.
Assisting in the purchase of your child’s first home
If your kids cannot wait five years to accumulate $40,000+ over five years, the Home Buyers’ Plan (HBP) may be of more immediate help, allowing the buyers to borrow up to $35,000 from their RRSP accounts, and pay it back without interest over 15 years.
But today’s big house prices may require more assistance from you, if you can afford it. You can make a gift, sufficient to cover the down payment. But this is risky, as 50% of marriages today end up in divorce. And your child may lose some of your money to the departing party.
We prefer to make a loan that can be registered against the property as a second mortgage. But banks don’t like that! They view it as evidence that the kids can’t afford the house. They insist that your money be a clear gift and not a loan. You have to work around this banking narrow-thinking to make it happen.
A parent’s gift or a loan for purposes of buying a house does not result in income attribution because the house isn’t intended to be an income producing investment. But interest-free loans and gifts often don’t get repaid and aren’t for the faint of heart.
If you are tight on funds for your own retirement, you would be wise to listen to what Polonius said: “Neither a lender, nor a borrower, be!”.
Instead help the kids to buy only what they can afford, using all the small tax programs available, and encourage him to pay back the mortgage as quickly as possible. Get their employers to lend them funds interest-free. Get wealthy relatives to help out. Make it a family affair!