Helping your child buy their first home
3 common options
- LoanLoan An agreement to borrow money for a set period of time. You agree to pay back the full amount, plus interest, by a set date.+ read full definition your child the money
Decide how much interest you want to charge. For example, you could charge the same or a higher rate of interest than what the money would earn in a bank accountAccount An agreement you make with a financial institution to handle your money. You can set up an account for depositing and withdrawing, earning interest, borrowing, investing, etc.+ read full definition. Or you could set the rate lower than your child would pay on a mortgageMortgage A loan that you get to pay for a home or other property. Often the loan is for 20 years or more. You make a set number of payments for a set amount each year.+ read full definition from a financial institution. You must declare any interest you earn on your taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition return.
Your child will also pay a surcharge if Canada Mortgage and Housing Corporation (CMHC) insurance is required. This is because part or all of the down paymentDown payment The money you put into buying a large item like a car or home.+ read full definition was borrowed.
- Co-sign your child’s mortgage
Add your name to your child’s mortgage. It seems like an easy way to help. But there are a number of risks:
- It tells the bank that your child’s income or credit ratingCredit rating A way to score a person or company’s ability to repay money that it borrows based on credit and payment history. Your credit score is based on your borrowing history and financial situation, including your savings and debts.+ read full definition is not good enough to qualify on their own.
- If you already have a mortgage on your own home, you and your child would not qualify for a high-ratio mortgage. Together, you would have to pay 20% down. On their own, your child could pay as little as 5% down.
- You are liable for the mortgage payments if your child defaults.
- Your name is on the titleTitle The legal right to own or hold an item.+ read full definition of the property. If something goes wrong, you legally have to shareShare A piece of ownership in a company. A share does not give you direct control over the company’s daily operations. But it does let you get a share of profits if the company pays dividends.+ read full definition the responsibility. Check with a lawyer about the implications.
- Pay some or all of the costs as a gift
You can choose to give your child enough money for a down payment, pay their monthly mortgage costs or even buy a home outright for them. There is no tax on cash gifts in Canada, but there are tax implications:
- If it’s a gift you plan to leave your children in your will anyway, you will save them from paying probateProbate Fees to settle your estate after your death. The probate process includes reviewing your will to ensure it’s valid. Also includes paying any debts and giving your money and property to the beneficiaries you have named in your will.+ read full definition fees after your death.
- If you buy a home as a gift for your child, it’s as though you sold the property to them at fair market valueMarket value The value of an investment on the statement date. The market value tells you what your investment is worth as at a certain date. Example: If you had 100 units and the price was $2 on the statement date, their market value would be $200.+ read full definition. So you will have to pay tax on any capital gainCapital gain The money you make when you sell an investment or some other asset for more than you paid for it.+ read full definition if, when you give the house to your child, it is worth more than you paid for it.
- If your child is getting married, think carefully about gifting money to them. If the marriage ends, your child and their spouse would split any equityEquity Two meanings: 1. The part of investment you have paid for in cash. Example: you may have equity in a home or a business. 2. Investments in the stock market. Example: equity mutual funds.+ read full definition in the home. It doesn’t matter that you gave it as a gift to your child.
Think carefully about taking on debtDebt Money that you have borrowed. You must repay the loan, with interest, by a set date.+ read full definition to help out your children. Make sure you are on track for your own retirement and other financial goals.