By Sarah Bull, Partner & Portfolio Manager at KJ Harrison & Philip Lieberman, Partner & Portfolio Manager at KJ Harrison
As a financial management adviser to high-net-worth individuals and families, we see more and more clients with that question on their minds. It’s understandable. Over the past decade, housing prices in Toronto have roughly doubled, and they show few signs of slowing down. Often, young Torontonians simply do not have the savings to manage a substantial down payment on even a modest home. It’s no wonder, then, that parents who have the means are increasingly deciding to help out.
As natural as it is for parents to want to help their children, it is not a decision to be taken lightly. Beyond the impact on the parents’ financial situation, gifting or lending money to children for a home purchase can have legal and tax implications – and may even impact family dynamics and relationships.
At KJ Harrison, we take a holistic approach to financial management, including investment services and financial advice. So when it comes to supporting a child’s home purchase, our message is clear: make sure you know your options, get the financial and legal advice you need to make the choice that is right for your family, and then integrate it into your long-term financial strategy.
Every family is different. That is why we work closely with our clients to understand not just their financial situation, but also their goals and their expectations for themselves and their families. If supporting children in a home purchase is among those, we can develop a strategy for the transaction that fits into a long-term financial plan; we can also coordinate with legal and accounting counsel to help ensure clients are equipped to make informed decisions.
Here are three options for helping a child buy a home that our clients often consider:
- Gifting the money: If parents know they will have a legacy and prefer to see that money get used now, they may choose to simply give funds towards their child’s home. While it is perhaps the simplest option, gifting could become complicated in the future. For instance, if your child’s marriage breaks down, that gift may be considered part of the marital estate, and your child’s soon-to-be ex may be entitled to half of it.
- Lending the money: Structuring support for a home purchase as a mortgage could mitigate risks to a family’s capital, since the mortgage is a debt that would have to be repaid upon sale of the property. One potential complication: if an additional bank mortgage is required, the loan could affect the borrowers’ debt service ratio and their mortgage eligibility.
- Gifting your residence: Obviously not for every parent, but if the timing is right – perhaps you’re ready to downsize, or just want a change – gifting a principal residence could be a sound choice. Beyond the benefit of keeping a property with emotional value in the family, no capital gains or land transfer taxes would be incurred (as long as the parents own the home outright).
As you can see, a number of options are available, each with their own benefits and risks. Above all, if you are considering supporting a child in what is likely the biggest purchase of their lives – and a substantial one for you – make sure you get the advice that is right for you and your family.
We can help.