In today’s housing market, first-time homebuyers are often at a disadvantage. Rising home prices and rigorous mortgage requirements have made entering the market more difficult than ever — and young house hunters may still be carrying student debt.
Given these challenges, many parents provide financial assistance to adult children looking to buy a home — and your clients may want to help their kids out too.
According to the U.S. National Association of Realtors’ 2021 Home Buyers and Sellers Generational Trends report, 23% of homebuyers between the ages of 22 and 30 reported that cash gifts from family or friends was the source of their down payment.
And in a 2019 Royal Bank of Canada (RBC) poll on family finances, 96% of parents with adult children between the ages of 18 and 35 said they have financially supported their children into adulthood, with 48% still subsidizing their 30- to 35-year-old children.
While 88% of parents polled by RBC said they were grateful to be able to help their adult children, 36% said they were concerned about the impact on their retirement savings and another 33% feared that helping their kids might delay retirement plans altogether.
Robyn Thompson, president of Castlemark Wealth Management Inc. in Toronto, said having the means to help your children is both a blessing and a luxury. However, there are several factors your clients should consider before they fork over tens (or hundreds) of thousands of dollars for a down payment on their child’s house.
“I am a big proponent of giving money with a warm hand,” Thompson said. “But I think you have to have a clear understanding of whether or not your clients can afford it. Is this something they are able to manage in their life? Does it fit into their financial plan?”
First and foremost, Thompson said, you must consider your client’s financial goals. “I think as an advisor, it is important for us to outline to our clients that they are not just giving up the money they have now, but they are giving away the future potential that money has to build in their portfolio,” she said.
You must not only determine whether your client can afford to help their child now, but also consider how giving such a large gift could impact your client’s future. Lifespans are increasing, which means your clients may need a large nest egg. “You need to make sure your clients aren’t overextending themselves,” Thompson said.
Clients who are able to help their child with a down payment also have to determine both what they are going to give and how they are going to give it. There are several ways parents can help their children buy a home, and you can outline the options so your client makes an informed decision.
Thompson said she discusses three main scenarios with her clients: making a loan to their child, co-signing a mortgage or giving an outright gift. If your client decides to make a loan to their child, they must consider what — if any — interest they will charge.
“Generally, family loans are mutual agreements hashed out over a dining-room table, but you should make sure to have a clear understanding of what the repayment terms will be and what the responsibilities are for both parent and child before you go down that road,” Thompson said.
Family loans can get tricky, especially when you don’t consult a lawyer, said Christine LaLiberté, senior investment advisor with Insightful Wealth Group in Surrey, B.C.
“The issue is parents think they can loan their child money with loose terms. But if they don’t get it legalized and go to a lawyer to draft [the terms of the loan] or secure some collateral, then it really isn’t worth a whole lot. If there is a dissolution of marriage, [the child is] sued or the property value goes down, the parents will be last in line to receive the money,” LaLiberté said.
If the loan is unsecured, LaLiberté added, she doesn’t factor repayment of the loan into her client’s future financial plan.
If a parent is unable or unwilling to provide financial support up front, they may be able to assist their child by co-signing a mortgage. Parents would assume a shared legal responsibility in this case, agreeing to repay the mortgage if the child is unable to do so.
Finally, parents have the option of giving their child an outright gift. There is no “gift tax” in Canada, so any resident who receives a gift or inheritance of any amount does not have to include it in their income. But if a client gives money to their child for a matrimonial home, they may be concerned about what will happen if their child divorces.
“One of the things I find with baby boomers is that they want to gift, but they still want that little bit of control,” LaLiberté said. “They don’t want the money back, but they want it to stay with the person they gifted it to.”
Similar to a loan, a gift or inheritance can be secured from the possible dissolution of a marriage if a structure is put in place by legal counsel. For example, a contractual agreement may stipulate that if your client’s child divorces, the money stays with the child and not the child’s former spouse.
Paul Green, portfolio manager at Green Private Wealth Counsel in Woodstock, Ont., said many of his clients are interested in gifting money to their children: “I have clients who specifically have particular goals around gifting money to their kids, so I factor that into their financial plan.”
Including future gifts in a financial plan is key to ensuring that clients achieve their other goals, LaLiberté said: “My priority as a financial advisor is to make sure that my clients’ wishes, goals and desires are met without risking their game plan.”
In the past year, Thompson said, she has seen an uptick in clients who want to help their children out. For clients who are already comfortable in their retirement, discussing monetary gifts can be easy. For other clients, the conversation is more complex and comes down to what the client can realistically contribute without overextending themselves.
“It’s not unique for parents to want to help their children, and it has intensified during the pandemic,” Thompson said. “I think it is an amazing gift for parents to be able to do that for their children, and it’s a good opportunity for advisors to illustrate the value of planning and outlining different scenarios so their clients can make informed decisions.”