It seems most urgent for parents to help their adult children get into the housing market when real estate prices are soaring.
But now is actually an opportune moment to consider offering money for a down payment. House prices are falling fast in cities across the country, which means parental gifts can help reduce the size of the mortgages first-time buyers must take on. This is huge because the rise in mortgage rates over the past year has made it harder than ever to afford the cost of home ownership.
A parent recently got in touch to ask how best to offer help with a down payment – by tapping the home equity line of credit he and his spouse have on their paid-off home, or by taking out a reverse mortgage.
For some guidance, I consulted Julia Chung, a certified financial planner (CFP) with Spring Planning. She put a lot more emphasis on the planning side of the gift rather than the product used to actually deliver it. But she did ultimately pick one over the other: “I think we might look at the HELOC, just because there’s more flexibility.”
It’s important to note that the interest rates for HELOCs and reverse mortgages have been caught up in the same rise in borrowing costs that has affected mortgages. A HELOC rate might start at 6.7 per cent, while reverse mortgage rates can range between 6.99 and 9.4 per cent right now.
The flexibility Ms. Chung mentioned refers to repayment. A HELOC requires that you at least pay the interest owing every month, but you can repay the principal whenever you want. A reverse mortgage is more comfortable in the near term because you don’t have to repay anything. But when you sell your home, you must repay principal plus interest that has quietly been accumulating in the background.
The reader who asked about HELOCs and reverse mortgages is in his 60s. He and his spouse could be in his home for another 20 to 25 years, long enough to build up interest that cuts significantly into the equity left over from the sale price.
Ms. Chung raised two financial planning issues with a parent gift of home down payment money. One is whether parents can afford to make the gift and still cover their own living costs now and in the future. “How much of your future comfort are you potentially giving away in debt servicing costs in order to manage this?” she asked.
The other planning issue is related to family dynamics. For example, what happens to the gift money if a married adult child gets divorced? The risk is that half the gift money goes to your child’s estranged spouse. To address this risk, Ms. Chung suggested transferring money to adult children via a low- or zero-interest loan or promissory note instead of a gift. Input from a lawyer is strongly recommended.
Finally, Ms. Chung recommends a thorough family discussion, parents and adult kids, about the down payment help. A chance for both parties to air any concerns.
Subscribe to Carrick on Money
Are you reading this newsletter on the web or did someone forward the e-mail version to you? If so, you can sign up for Carrick on Money here.
Is there hope in housing?
Globe personal finance reporter Erica Alini is looking to connect with people across Canada who are hoping to buy their first home about what they’re seeing in the current housing market. If you bought in the past couple of months or are house hunting right now and would be up for an interview, please reach out to Erica at ealini@globeandmail.com – Please note we would need to use your full name in an article.
Rob’s personal finance reading list
RRSP or TFSA
The Squawkfox blog guides you through the differences between registered retirement savings plans and tax-free savings accounts. Thorough and well explained.
‘I’m starting to hate and resent the place’
A 31-year-old nurse in the Toronto area vents on Reddit about buying a condo and then being hit with rising rates on a variable-rate mortgage. Some compassionate comments can be found in the responses from some people in the forum, including some suggestions on how to boost income.
The millennial 1%
A financial blogger looks at millennials and finds “a wealth gap so gappy, it makes the Boomers look egalitarian.”
New thoughts on an old retirement debate
A long-time rule of retirement planning is that it’s safe to withdraw 3 to 4 per cent of your portfolio per year to live on. The underlying assumption is that market gains will be sufficient to prevent you from running out of money. A new line of thinking suggests that we drop the idea of the safe withdrawal rate altogether and instead adjust withdrawals and spending in response to portfolio performance.
Q&A
Q: I am a 30-year-old single earning $70,000 a year. I currently rent and am thinking I might want to purchase a home in the future, and I also want to start taking advantage of the tax savings I can realize from investing in registered accounts. I am thinking that the new Tax-Free First Home Savings Account is my best option, but it is not available until later this year and I want to invest before the March 1 deadline for registered retirement savings plan contributions. Where should I put my $3,000 so that I will have the option of transferring it to the FHSA when it becomes available?
A: This backgrounder on the new FHSA from Chartered Professional Accountants Canada says you can transfer money from an RRSP to a FHSA tax-free up to the contribution limits – $8,000 per year and $40,000 lifetime.
Do you have a question for me? Send it my way. Sorry I can't answer every one personally. Questions and answers are edited for length and clarity.
Today’s financial tool
How does your debt compare to Canadians your age? Find out with this calculator
The money-free zone
Tell Me Why, by the Soul Revivers. Reggae with soul.
ICYMI
What I’ve been writing about
- How much debt is each generation of Canadians carrying, and how do you compare?
- Wealthy households fuel the inflation that makes life unaffordable for others
- Suddenly, the interest rate winds have turned against GIC investors
More Rob Carrick and money coverage
Subscribe to Stress Test on Apple podcasts or Spotify. For more money stories, follow me on Instagram and Twitter, and join the discussion on my Facebook page. Millennial readers, join our Gen Y Money Facebook group.
Even more coverage from Rob Carrick:
- 🎧 Catch up on Stress Test: Is the middle class dead for millennials and Gen Z? • Gas prices are soaring. Are electric vehicles an affordable solution? • Crypto is booming, but should you invest? • How are young Canadians dealing with soaring rents? • Inflation is squeezing our finances. What can we do about it? • Is a hot housing market squeezing Canadians out of their small towns?
- ✔️ The housing file: How bad is housing affordability? Even a crash won't help • Sell the family home to lock in profit and then rent? Better not • Why young adults can't afford houses: Hard work got you more in the past than it does now • Five reasons you should not buy a house till you're at least 30 • Now more than ever, owning a house is not a retirement plan
- 📈 Investing: The 2022 ETF buyer's guide: Best Canadian equity funds • The 2022 Globe and Mail digital broker ranking: Does the zero-commission revolution flip the script on who's best? • With bonds sinking, conservative investors are waking up to risks they never saw coming • A five-step plan for dealing with the sad fact that almost every investment is falling lately • The best financial advice in advance of retirement? Work on your marriage • One-year GICs are the best deal in town for safety seekers • What to do if the financial plan you paid thousands for disappoints
- 💰 Your money: Are you prepared for the pandemic wealth boom to blow up in our faces? • This hard-working 24-year-old is nailing it financially. But where’s the happiness? • Who should and shouldn’t worry about the wave of rate increases this year, and what every stressed-out borrower should do right now • Don’t make this potentially costly assumption about the CPP Survivor’s pension
