Should parents help kids buy a home?

Emma’s ex-husband gave their two twenty-something sons a $30,000 down payment. She thinks that was a big mistake.

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by

From the December/January 2012 issue of the magazine.

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4. Winnipeg, MBFour years ago, at the age of 24, Jonas Knight decided to buy his first house. Prices had been shooting up in his home town of Maple Ridge, a suburb of Vancouver, and he felt that if he didn’t get in the market soon, he never would. Problem was, like many young Canadians, he couldn’t afford even a basic starter home.

To help ease the burden, his brother Derek, 21, agreed to go halfers (we’ve changed their names to protect their privacy). Derek would own half the house and pay half the mortgage, and Jonas would live in it and rent part of it out to friends. But even then, they didn’t have enough to make the down payment on the $420,000 wood-frame house they were eyeing. So they turned to mom and dad. The brothers made separate pleas to their parents, who are divorced. Their dad, Russell, said yes, agreeing to give them $15,000 each for the down payment. Their mom, Emma, said no.

Which parent did the right thing? It’s a question I just can’t get out of my head—perhaps because my husband and I recently purchased our second home and I’m eight months pregnant. I know how tough it is for young home buyers, and 20 or 30 years from now, when my son buys his first home, I could face the same request. To help me make up my mind, I decided to research the arguments for and against helping your kids buy their first home.

Your kids have it tougher

Quite quickly I came across the most compelling argument in favour of helping your kids: Houses are much less affordable now than they were when you bought your first home. Canadian households earn $35,000 more today than a generation ago. But that’s before you factor in the rising cost of living, known as inflation. Once you do, you find that the typical Canadian household makes about the same as in 1980.

But home prices sure aren’t the same as they were back then. Even after accounting for inflation, the average Canadian home now costs dramatically more than in 1980. If you were looking to buy an average-priced Canadian home back then and you earned an average income, you would have to save every penny you made for 1.9 years to completely pay it off. But if you earned an average income today and wanted to buy the same home, you’d have to save for 4.4 years.

Mixing family and money

At this point I was pretty convinced: only cold-hearted parents would refuse to help out their kids. But then I talked to Karin Mizgala, CEO of MoneyCoaches Canada, a national network of fee-only financial professionals.

She told me there are strong reasons not to help an adult child get into the property market. “If money weren’t an object and life were perfect, I’d say don’t do it,” says Mizgala. “Mixing family and money has the potential for disastrous family dynamics.” She warns that setting up a “parental bank” could create a sense of entitlement and expectation. “This can be very dangerous to a child’s financial and overall maturity.”

Still, she did suggest a compromise: Instead of giving your kids the money, you could loan it to them. “But you have to write a formal agreement and put everything in writing,” says Mizgala. “That way your expectations are clear, your child doesn’t feel beholden to you, and they continue to develop their own sense of independence.”

Tied to the home

There’s one more argument against giving your kids the money, and this one I learned from Emma. You’ll recall that she refused to give her two sons Jonas and Derek any money for their down payment. And she’s still not sure her ex-husband did the right thing by giving them the money. You see, since buying the house, her sons, who run their own construction business, have run into some hard times. To help them make their mortgage payments, Emma and her new husband have hired them on at their standard rate to do home renovations for them.

Emma sees her sons, both not yet 30, stressing out about making their payments and she can’t help wondering if they were too young to buy a home. “Their mortgage is like a ball and chain,” she says. They can’t travel, change professions, or even save for another big purchase.

Mizgala agrees this can be a problem. By jump-starting your kids into home ownership, you may not be doing them a favour. “Check your own motives for helping,” Mizgala says. “We live in a culture where not owning draws criticism and judgment. That kind of guilt can play on a parent.” Asking your kids to spend a few years saving up a bigger down payment before they buy helps to ensure they’ll be ready for the responsibility of home ownership when they do.

After considering both Mizgala’s arguments and the genuine struggle that young people have to go through to buy, my husband and I have decided that when the time comes, we will help our boy—but we’ll loan him the money at prime, not give it to him. We believe that by structuring our financial contribution as a low-interest family mortgage, and not as a gift, we’ll help him stay fiscally responsible. And that’s a lesson that will keep on giving, even after his starter home has come and gone.

Read more from Romana King at Home Owner on Facebook »

16 comments on “Should parents help kids buy a home?

  1. I have several clients who gave a down payment contribution to their kids, when the truth is, the parents themselves could not really afford it. In most cases, they drew down from the equity in their own home to make the gift. And they are never ever gonna see that money again.

    Karen Mizgala is correct – if you do help, make it a binding loan. The overall picture still has to make sense, and you have to know your child and gauge their ability to manage this huge responsibility. Basically, your kids are buying a home with zero down payment (from their own pocket) – which is the ultimate leverage.

    If they fail to meet their property tax and mortgage obligations, the house will be sold from under them and your promissory note will be nothing more than an empty piece of paper.

    I do not think any parent should think of this as yet another in the never ending list of financial responsibilities we bear when we have children – the line has to be drawn somewhere; and it should not be applied to all your children willy nilly. You know each child best – you should know which ones this can be a winning approach with, and for which ones it maybe a disaster waiting to happen.

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    • Saying "any parent" is a bold statement, and is assuming everyone's in the same situation. And as H.M. Hare stated, you don't get to keep your money when you die, so why hoard if you're within the financial means to help your children out in their earlier years.

      Maybe I'm biased because my mom recently helped me put a down-payment on my home. Karin (from the first page of this article) stated: "She warns that setting up a “parental bank” could create a sense of entitlement and expectation. “This can be very dangerous to a child’s financial and overall maturity.”"

      It's the exact reason of that I am financially mature, that my mother gave me money for my home's down-payment. I plan on doing the same for my kids, and I might even be able to help them out even more than my mom because of this earlier start.

      My $0.02

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  2. Instead of a loan, maybe consider matching thier down payment savings with your own money?
    For every dollar they save, you can match that or every dollar match $0.50.

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  3. Reality is that one day your kids will inherit what you leave them, so why not start them off now rather than be an old person with a ton of cash that people are just waiting for you to die?

    the kids may or may not do what you expect, but that is up to them, once you have given them the monies, they will make their own choices.

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  4. I would rather give my child money for a downpayment than pay for a wedding, for instance. I think the home would provide much more value in the end, provided they looked at the home AS an investment and were sure they could make the payments by renting it out, for instance, in the event they didn't want to live in the home.

    In fact, when my daughter was born we bought an income property to serve as her "education property". When the time comes for university we can sell it and have more than she'll need.

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  5. I agree that the money should be loaned to your kids, not given to them. The fact is that most kids growing up in generation Y feel "entitled" to everything. They want to have the nicest phone,laptop, ipad etc..but fail to save for the important things like a house. It is imporatant that we do not spoil our kids, and that they earn their accomplishments, instead of having them handed to them as a result of their parents (or grandparents) sweat.

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  6. With a 4 out of 10 divorce rate in Canada, I think a loan/mortgage (interest free if you like) verses a gift might be better for newlywed kids. Although everyone would like to believe all marriages will last forever, if things goes sore after a few years, all monies given would also be split in two.

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  7. I think it's hard to generalize about a decision like this. Clearly parents shouldn't put their own retirement future in jeopardy by giving their kids money. And probably you shouldn't give a down payment to 20-something children who are still pursuing other goals like education and early careers that might include spaces of unemployment, or require them to move to another city. But if your kids are responsible, and have saved enough on their own to contributed to the down payment, and you have the money, then why not? My husband and I bought our first home in our 30s, in Calgary, where the real estate market was going nuts at the time (2007). We had money for a down payment, but our parents gave us top-up money so we could meet the CMHC threshold and not owe so much. Recently, my husband's mother got a sizable inheritance after her own mother's death, and gave some to each of her kids. Her rationale was that at this point in her life, she doesn't need all that money, but she could have used it when she was younger, so why not pass it on to her kids, who, unlike her, have a mortgage and monthly childcare expenses, and could use the money to shave a few years off the mortgage. We really appreciated the money, and by being able to pay down a big chunk of our mortgage up front, we shaved about 5 years off of it; whereas if we inherited that money in our 50s or 60s, we would (hopefully) have fewer pressing expenses and less need of it.

    Reply

    • It is quite likely that your husband's mother had to "get rid" of some funds, in order to meet various tax guidelines. And yes, it is great to be able to give your kids a helping hand, however, not every parent can expect to see an inheritance and many still have a mortgage – thanks to economic changes.

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  8. Philosophically I believe children through young adults need to learn how much sacrifice and hard work it takes to save to be able to do things, whether it's post-secondary education, buying a car or getting a house. My parents saved what they could for my education (paid almost a years worth), but I was expected to find my own way to pay for school without going into debt. This made me get a job, find scholarships and start my own businesses to pay my way. By the end of university I had over $40,000 saved because I knew that it was up to me to pay for my life and that I shouldn't expect people to take care of me. I fear that far too many parents want to 'help out' and have the means to do so but end up delaying or diminishing the personal growth of their children. Looking at the statistics on live-in kids going well into their 30s with no ambition appears to back up these fears.

    Now that I have a child I am dead set on giving them a minimal allowance and teaching them how to generate income very early in life. We have RESPs which are targeted to pay for a year of schooling. For everything else they are on their own. It will be up to them to prioritize what they want in life; my hope is that they do whatever they feel passionate about and making a meaningful contribution to the world.

    Any argument about house prices being less affordable now and that kids 'need help' should clue in a parent that we are in an abnormal time period, and that it probably isn't a good time to be buying in many areas of Canada. We have seen prices come down around the world again and again ever since Japan's bubble burst in the 80s; it would be far better to teach your kids about how investing and market psychology really works then throw away money that will be lost equity as soon as interest rates go up. Just because someone gets married or is 'ready' to buy a home doesn't mean that they need to get into the market – the concept that real estate only goes up is a fallacy that should not be perpetuated by a well meaning parent.

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    • Amen!

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  9. I'm afraid I'll have to side with John and his comments on the divorce rate. For starters, I'm divorced and have been for 12 years. I've paid a ton in child support and many more dollars towards my kids needs because, according to them, "mom has no money"…yea right…..even though my kids haven't spoken to me in over 5 years, I continue to pay for one child, why, because she's a professional student at 22 years old in post secondary….and mom continues to drag me through the courts when she finds out I've made extra income., looking for that little trickle more of child support….so for me, there will be no house down payment for either of my kids, and at the end of my life, whatever money I have in the bank, will go to some doggie day care center, or something like that. Generation Y, yes, I know all about that now….fancy cloths, nice cars, all the latest in technology…..I see where the priorities lie with the youth of today..its all about them

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  10. I dont understand why Western people count every penny that they plans to give it to their own kids, what ever money spend for Wedding or House or what they need, just helping your own kid having a better life in the future. For oritental parent there is no such thing LOANS between parent and kids. whatever they do, whatever they give just because they love their own kid and would like them to have a great life

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  11. I do not have a home i'm just 11. my family got kicd out of are home i love my family. I am not ok but i'm trying to be ok but it's hord.

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  12. I know I guy that put a big dent into his net worth & bought his son a house.

    His son got married a few months latter. His son & the sons wife were to young to have any net worth built up other then the home that was given to them.

    The marriage only lasted a few months & the house had to be sold to split the money 50/50

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    Reply

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