Owning a home is a dream for most Canadians, and as parents, we want to provide the best opportunities for our children to achieve this milestone. Helping your children buy a home is not only a significant financial decision but also an emotional investment in their future.

Homeownership is a symbol of financial maturity and stability, and an investment that pays off in the long term with a more secure financial future. However, buying a home is a challenge for first-time buyers who do not have the benefit of a large down payment, enough income, or established credit history.

Not surprisingly, an increasing number of parents are helping their children achieve their homes. A study conducted by OREA (Ontario Real Estate Association) revealed that nearly 90% of Ontario’s parents agree that it is more difficult to buy a home today as compared to when they were of a similar age and looking to buy their first home. The study uncovered that about 40% of young Ontario homeowners received financial help from their parents when buying their homes. Abacus Data which conducted the survey for OREA found that gifting parents gave an average of $73,605, while parents that provided a loan gave an average of $40,878.

For parents, the desire to help their children achieve this goal is natural, but it can be tricky to determine all the ins and outs of the many options available. Here we’ll explore how parents can support their children in achieving homeownership while minimizing their own risk and ensuring the best outcome for their children.

Challenges Facing First-Time Homebuyers

The challenges facing first-time homebuyers in Mississauga, Toronto, and the GTA are many and complex. One significant obstacle is the persistent lack of housing supply, with new construction failing to keep pace with the increasing influx of immigrants to our area. This scarcity of available homes contributes to rising prices, making it difficult for first-time buyers to find affordable options.

Government regulations and stringent mortgage qualification criteria pose further hurdles, as they require potential homebuyers to meet strict financial requirements and pass a stress test to get approved.

High levels of student loan debt and the need for substantial down payments further compound the challenges for first-time buyers. And the high cost of living in Mississauga, Toronto, and the GTA makes it difficult to save up for a down payment. Other challenges include credit history or debt issues, which can impact a buyer’s ability to qualify for a mortgage or secure favorable interest rates.

The competitive nature of the real estate market and bidding wars can add to the frustration and obstacles faced by those looking to purchase their first home. Additionally, rising interest rates and increasing property taxes add even more financial strain to an already challenging process.

All these factors add layers of difficulty for first-time buyers, making it difficult for them to enter the housing market without parental assistance.

Ways Parents Can Help

Fortunately, there are several options available to parents who want to help their children achieve homeownership. Let’s explore common approaches: down payment assistance and co-signing. We’ll also look at the newly launched First Home Savings Account.

Gifted Down Payment: A gifted down payment involves parents providing funds to their children to cover a portion or the full down-payment on a home. This option can significantly reduce the financial burden on your children and increase their chances of qualifying for a mortgage. The only requirement is that the lender will want a signed gift letter that says the funds are a gift and there is no repayment requirement. A gifted down payment can help your child enter the housing market sooner, allowing them to start benefiting from appreciation in the property’s value. However, it’s important to ensure that the child is personally ready for homeownership before giving a large gift. Additionally, if the child is married, there could be property law issues to consider.

Another way to provide a gift is to help with monthly mortgage payments. This is a good option if it’s difficult to come up with a lump sum, although sometimes it’s that initial large down- payment that is the most pressing need.

Providing a loan: There are advantages to structuring your assistance as a loan vs an outright gift. You decide whether it should be an interest-free loan or with a specified interest rate, and you place a lien on the property. The loan agreement will protect funds from creditors in the event of a small business failure should that be applicable.

A documented loan amount is also more advantageous in the event of a divorce as a gifted downpayment is part of the matrimonial home and is subject to 50% division, whereas a documented loan isn’t. The loan can later be repaid upon the matrimonial home sale and these funds can then help your child purchase a new home. It’s important to note that if a loan agreement is crafted, it will be considered a loan by lenders, which means it will be added to the liabilities section of the application and could have an impact on mortgage qualifying.

Co-signing: If you become a co-signor on your child’s mortgage application, you assume joint responsibility for the loan and agree to be responsible for the mortgage payments if the child defaults. This can help increase the child’s borrowing capacity and improve their chances of securing a mortgage with favorable terms.

However, co-signing comes with risks, as it ties the parents’ credit and finances to the child’s mortgage and can impact their financial stability. It’s crucial to understand the potential implications and have open and honest conversations about financial responsibilities and contingencies. That’s why it’s essential to consider your own financial stability and credit score before agreeing to co-sign.

First Home Savings Account: If you’re thinking about supporting your child’s home-buying journey in the future, consider contributing to the new First Home Savings Account. You can contribute up to $8,000 per year ($40,000 in total), giving your child a bonus tax deduction for those contributions, which can further bolster their downpayment savings – a big win for their future as a homebuyer!

Factors to Consider When Determining Your Child’s Preparedness

While parents may have the means to assist their children financially, it’s equally important to assess the child’s readiness for the responsibility of homeownership. Factors to consider include their financial stability, employment status and income, credit score, and ability to handle mortgage payments and homeownership responsibilities. Honest conversations about the financial commitment, maintenance, and potential challenges of homeownership will help ensure that your child is prepared for this significant step. For some children, renting may be a better option until they are more financially stable.

Personal Financial Situation

It’s crucial to consider your own financial situation when deciding how to help your child purchase a home. While you may want to give a generous gift or co-sign the mortgage, it’s important not to jeopardize your financial stability. Consider your retirement plans, debt obligations, and long-term financial goals. Ensuring your financial stability is vital to provide meaningful support to your children without jeopardizing your future.

Marriage and Property Law Issues

If your child is married or in a common-law relationship, it’s essential to consider the implications of property law. Understanding spousal rights, potential separation scenarios and legal agreements can help protect everyone’s interests. Consulting with a family lawyer specializing in real estate matters can provide valuable guidance.

Family Harmony

Finally, it’s essential to consider how assisting your child with homeownership could impact family harmony. It’s not uncommon for financial transactions between family members to cause tension or strain in relationships. It’s important to communicate openly about expectations and ensure that everyone is comfortable with the arrangement.

Government Incentives

In addition to parental assistance, several government incentives are available to first-time homebuyers. These include rebates on land transfer taxes, first-time buyer tax credit, grants for energy-efficient upgrades, and more. Parents can help their children navigate these programs and ensure they take advantage of all available benefits. A detailed overview can be found here.

What’s the bottom line?

Opening the door to homeownership for your children is a significant milestone that requires careful consideration and planning. By understanding the challenges faced by homebuyers in Mississauga, Toronto, and the GTA, exploring available ways you can help, assessing your child’s readiness for homeownership, and navigating potential legal and financial complexities, you can provide meaningful support while mitigating risks for all involved.

Remember to prioritize open communication, consider your personal financial situation, and seek professional advice when needed.

Joe Purewal, Mississauga Mortgage Broker, and Team are here for you and your child and can act as your guide as you navigate this first home purchase, answering any questions you may have and achieving the best mortgage deal possible. Working together, we can ensure your children achieve their dreams of owning a home and lay the foundation for their future financial stability. After all, we have been providing the best mortgage advice and solutions for first-time buyers and their parents in Mississauga, Toronto, and the GTA for over 20 years!