(Photo: Sarandy Westfall for Unsplash)
money and people. Rising home prices, and thus higher payments, have made it difficult for many first-time buyers in recent months. Some knocked on Mom and Dad’s door to get a little financial help.
Caroline Liszot admits it right away. For a year, a BMO mortgage finance advisor didn’t have a lot of files on her table from first-time buyers that involve financial involvement by parents. “Now, one in five real estate transactions involves a parent gift or loan. That was the case for a third of the twelve files I was dealing with at the beginning of August.
However, the contribution of father and mother was rather scarce at the turn of the new millennium, and he would like to identify this expert who has developed in this profession for 20 years. “In fact, it happened mainly when the buyer had credit problems. I noticed that today this practice has become common, regardless of the economic situation of the child. »
Simon Gero, a mortgage broker and financial security consultant with GPS Équipe Conseil, in Plainville, says home price increases — more than 25% in one year in certain areas of Quebec — largely explain the trend. Also noted was the tightening of mortgage loan rules, which now require prequalification with interest rates of 5.25%, as well as a 20% down payment to avoid the premium.
Good idea to contribute?
Is it a good idea for parents to invite themselves over to the heart of one of the most important acquisitions a Junior will make during his lifetime? “Why not?” responds to Pierre Raphael Como, expert wealth management advisor at Laurentian Bank. Provided that the contribution is made with thought and preparation, there is no harm in the ability of financially secure parents to contribute to the purchase of their children’s property. An opinion shared by all other experts that have been made. Contact them for this article.
The problem is that the epidemic has undoubtedly precipitated this kind of contribution to many shacks. The effects of these hasty decisions are likely to be felt over the next two years,” the financial planner fears.
Same story from Simon Gero. The latter fears that the repercussions of the bidding on the real estate market will be felt from next spring. On top of that, he says, more than a quarter of his early buyers who approached him in 2021 rightly, out of caution, postponed plans to buy him despite financial help from parents.
“Whether it’s $10,000, $20,000, or $50,000, it’s not a gift of money easily reaped on the corner of a table,” adds Pierre Raphael Como. “Parents who do this would benefit from consulting a financial planner before donating anything. He insists that such counseling, which is done first without the child being present, should include an in-depth analysis of the impact on parents’ savings in the short, medium and long term.”
The feasibility of such a project depends above all on the responsibility of the child, continues the financial planner of Laurentian Bank. “The first question these young buyers should ask themselves is not whether they are going to the bank, but rather, what should they give up when buying their property?” Future buyers need to be constantly reminded that buying a property is more From paying the mortgage monthly. It is also insurance, maintenance costs, renovation costs, municipal and school taxes, transfer taxes, not to mention furniture and accessories. In many cases, goodbye to travel, restaurants and other foods!
In this regard, the US company Bankrate published last June the results of a survey of 1,400 young people between the ages of 25 and 40 who recently became homeowners. Two-thirds of respondents (64%) already said they regretted buying their property due to unexpected costs.
“Before giving or lending a large sum to a child, I strongly suggest that parents test the child’s ability to save,” says Pierre Raphael Como. For example, he says, a child is required to save the cost of a potential mortgage for a year plus all other costs associated with purchasing a property. Or at least the difference in that amount with the current cost of his rent. “In addition to serving as a test, this exercise allows you to prepare a TFSA or RRSP that can be used as part of a Home Buyer Plan (HBP) during the transaction,” the advisor explains.
Each has its own contribution
The parents’ contribution can take the form of a gift (cash or capital) or a loan. “Cash donation is the most common method,” notes Nancy Canwell, a mortgage finance advisor at Multi-Prêts. “This financial gift should come from a relative who has a first-degree blood relationship with the child, particularly the father, mother, grandparents, or even a brother or sister,” the counselor states. The buyer must also announce this donation to the financial institution that is giving him the mortgage loan.
Although gifting stock is commonly used when selling real estate from parents to children or grandchildren, Nancy Canwell found that at least 5% of transactions involving parental assistance favor this option. “Some financial institutions, notably Desjardins, allow parents who have real value in their homes to offer part of it in the form of an additional guarantee as a down payment under certain conditions,” she explains.
However, a parental loan formula is rarely an option, notes a Multi-Prêts consultant. And remember that a parental loan can have the effect of increasing a buyer’s debt ratio. “In addition, parents will be required to declare the interest a child is paying for tax purposes because the purchase of a personal residence does not qualify for a tax deduction,” Nancy Canwell identifies.
Don’t forget the will
Parents who still choose the loan option have every interest in revising their will, warns Karen Precourt, director of wealth planning and taxation at BMO Private Wealth. “The loan becomes one of the assets of the estate. If the parents wish to write off the debt upon their death, they must mention this in their will. Otherwise, the child will have to repay the debt to the estate,” the chart explains.
Since discussing the topic of succession, Karen Precourt would like to remind parents of the importance of not confusing equality with fairness towards their children. “Jealousy between siblings usually arises when a situation is considered unfair,” she says. So parents who participate in a real estate transaction to help one of their children must make sure that balance is restored during their lifetime…or at least when they die. »
Finally, parents who agree to participate financially in the purchase of the property of the little ones have an interest in protecting the gift, whether the child is in a relationship or not, our experts advise. “Property acquired before marriage or by donation is excluded from family inheritance. But as a precaution, it is necessary to document the donation made to the child. In addition to the donation letter required by the financial institution granting the mortgage loan, we strongly suggest that parents add a copy of this letter to their file Notary notes ”, recommends Pierre Rafael Como.
In order to ensure the parents that the amount of the donation and the added value it generates over the years remain the exclusive property of the child, our planners encourage them to prepare a document to that effect. A letter showing the amount of the donation, the date of the transaction, the address of the property, an indication that the donation and the fruits of the donation are for the child, the signature of the parents, and the signature of the parents. the boy without forgetting that spouse if that is the case.