The Parent Trap
Many articles are targeted to parents who are considering providing their children with down payments. However, this article investigates the pros and cons of accepting parent’s help to break free of the frustrating rental cycle. If you have your heart set on a location or even a particular house it can be disheartening to be pouring money into an ever-climbing rental market. That same money could be invested into finally getting a home of your own.
Owning a home is becoming more and more difficult here in Canada and it’s about to get worse for first-time buyers. As many of you will have heard there has been adjustments made last year by Canada’s Bank Regulator, the Office of the Superintendent of Financial Institutions. It has tightened regulations as of the 1st of January 2018 meaning an increasing number potential home buyers are grappling for money to make a big enough down payment for an uninsured mortgage.
So the market is competitive and the stress tests are becoming ever more stringent in order to qualify for a mortgage. So how are people finding money for an exorbitant down payment; usually at around 20% of the total cost of the property? In 2016, Mortgage Professionals Canada stated that the number of first time owners using parents’ money as down payment had risen from 7% in 2000 to 15%. Once a mortgage has been sourced and accepted you will then spend a significant amount of earnings for a significant amount of time in order to be able to crawl out of debt. So it’s no wonder that first time buyers are seeking help from a more familiar institution: their parents. That being said, it’s not the $3 they begged for soda and a candy when they were eight years old but instead thousands of dollars. Each parent can gift up to $14,000 per annum to another individual without incurring gift tax. There are certain conditions to this law, including the lifetime limit of tax-free monetary gifts. This is an incentive for most people who know their parents could potentially part with this amount of money in the short term.
So how exactly does one go about asking their parents to help contribute to your house? Communication is key and it is so important not to be demanding or pushy. Next, it’s off to see a lawyer, do not disregard this step. It doesn’t matter if you get on “like a house on fire”, there needs to be parameters to protect both parties should anything go awry. Family feuds have ignited all too frequently over sensitive money issues. A loan agreement can be set up which makes sure that interest rates are agreed (including at 0%) as well as how many payments over a specified length of time. This, of course, can be reviewed but keeping to an agreement can prevent the all too common family monetary fall-out.
For people who have a poor credit history and their parents can’t help with a down payment they might consider co-signing a mortgage. Parents who have a better financial history than their child can help them qualify for a mortgage as they will promise to be responsible for mortgage payments if the primary mortgage holder fails to make said payments. It is crucial to be honest with yourself in order to enter into these conditions because unless your income is very stable and secure you could be putting a lot of financial strain on your parents.
I would not recommend you to ask your parents to take out a loan themselves to help you with a mortgage down payment. The housing market is climbing at the moment but if your house decreases in value then they might be paying interest on their loan to a house that is nowhere near the agreed buying price. If this is the situation consider sticking out the rental market for a few more years so you can afford your own down payment. And this brings me on to my final point.
In this section I want you to really look at your housing requirements. Do you really need an extra bedroom for guests? Do you have to live in the most chic street in town? Your parents have probably worked hard for their income and so have you. It seems we have quickly forgotten the mistakes that led to the housing crash of 2007. Many individuals and couples are again buying houses that are much more extravagant or superfluous than they actually need. The torment of worrying whether or not you can pay the next mortgage and extending the same stress onto your parents is, in my opinion, not worth that third bathroom.
As you begin the decision to ask for a family help in your mortgage I want to stress how it important it will be to begin discussions by sitting down in a formal manner on a level playing field as adults. Do not expect your parents to place you on the property ladder. In this article, I implore you to do significant research on all of the options available to you in attaining your first home. Have this preparation done before discussing financial help from your family.
Many people look no further than their initial down payments and just expect that the rest of the money will just fall into place. What with utility bills, repairs, renovations and housing tax you’ve got to have a decent plan drawn up to show your parents that you are truly committed to keeping your end of the bargain if they give you a gift or loan. So I suggest opening up a spreadsheet and allocating predicted income for the next ten years into mortgage repayments, parental loan repayments, utilities and maintenance segments. Show your parents how their money will help contribute to this plain but also prove that you can sustain your expenses into the future.
So there you have it. This is a less technical article than usual but that’s because there is a very important component to factor in when entering into a financial agreement with family; and that is the effect this monetary variable has on the dynamic of the relationship. But I hope this article explained the different options available to you and whether getting a loan from your parents will suit you.