With housing affordability shifting dramatically for a generation of Canadians, the "Bank of Mom and Dad" is a common expression used to describe parents giving their adult children financial help to purchase a home.
TD Wealth Senior Portfolio Manager Jeet Dhillon says that over the last few years, her clients are increasingly discussing and asking questions about providing financial assistance to their adult children who are hoping to get into the housing market.
While it's natural for some parents to want to help their kids get a leg up in the real estate market, helping out with a deposit or down payment – or more – can represent a significant chunk of money out-of-pocket.
Whether the money is to be a loan or a gift, Dhillon recommends parents have a plan in place that is clearly communicated to their kids. Most importantly, they need to make sure their own financial future can remain secure if they make the decision to provide this financial support to their kids.
"When it comes to family and money, what you don’t want is to create conflict down the road," she says. "Money decisions should be done with good communication so that intentions and expectations are clear for everyone involved."
Understand your own financial goals and needs
If you decide to give money to your adult children as a gift to help secure their financial footing, you'll first want to make sure you aren’t jeopardizing your own retirement or quality of life in your golden years.
"Helping your kids is important, but don’t do it at the expense of your own financial wellbeing," Dhillon says.
"You want to be as sure as possible that you will be able to afford the loan or gift and still have enough to address any needs you may have in your retirement years."
Dhillon said she has ongoing conversations about cash flow with clients to understand their financial needs in the short, medium, and long term. Your income, when you plan to retire, how you want to spend your retirement, and whether you plan to make big purchases down the road – such as a new car or second property – are all factors to consider.
If you plan on giving your kids money and need to sell investments or assets to make it happen, you'll also need to consider the timing and tax implications.
"A financial plan needs to address all aspects of your lifestyle including any financial gifts for your adult children," Dhillon says. "We want to get an understanding of what your goals are and what the timeline looks like so that we can help plan for these life events in the most efficient way possible.
When to consider a gifted down payment
For parents who can afford to gift money to their kids towards a down payment, they can consider what is known as a "gifted down payment," where the parent gifts their child a certain amount of money which is designated to go specifically to the down payment on a mortgage.
At TD, there are specific rules around who can give and receive gifted down payments. There are two varieties of gifted down payments: ones associated with standard mortgage applications, and ones associated with high-ratio mortgages.
A standard mortgage is one that does not exceed 80 per cent of the purchase price or value of the home, whichever is lower. Mortgages that exceed this limit must be insured against default (by CMHC or Genworth), and are referred to as high-ratio mortgages.
For high-ratio mortgages, a gifted down payment can only come from an immediate family member who is related to the recipient by blood, marriage (or common law), or adoption.
However, for standard applications, a gifted down payment could also come from a relative who does not fit one of the descriptions above. It's important to understand the requirements and restrictions in place before proceeding.
In either case – high ratio mortgage or standard mortgage – at TD the person giving the gift must sign a letter stating explicitly that the money is a gift, not a loan, and that the money does not need to be repaid. The letter also includes details such as the date of the gift, the amount of money gifted, and the relationship of the gift giver to the recipient.
It's important to note that a gifted down payment is considered non-repayable. For example, if you give your child and their spouse a gifted down payment, and your child later gets divorced and sells their home, the equity in the home would be split equally with their ex- spouse.
If parents are looking to lend their children money toward the down-payment (i.e. they would like it paid back), Dhillon says parents can lend the money as a private loan or private mortgage, where a written agreement is drawn up by a lawyer with the amount loaned, the interest rate, monthly payment amount and amortization period.
Communicate clearly and make your intentions known
Dhillon said it's not enough to make a financial plan – make sure your kids fully understand your intentions. This is especially important for parents with multiple children who may be providing their children with money at different points in their lives for things like higher education, weddings, or down payments.
Check in regularly with your financial plan
Speaking with a financial advisor and regularly updating your financial plan can help you look at the bigger picture and plan so you're not losing sleep about your own future because you've helped your kids. These kinds of conversations are especially important as your financial needs change over time.