It seems you can never close the book on the cost of being a parent.
Life event by life event, parental financial obligations are growing. Helping your children cover the cost of university or college expanded to post-graduation financial support, which expanded to big bucks for house down payments. Now, with mortgage rates spiking higher, we move into yet another phase.
Parents who helped with a home down payment, here’s a question for you: How will your kids manage if their mortgage costs soar? Given the latest thinking on inflation, rates still have room to run higher. Affording payments for both variable and fixed-rate mortgages could be tense.
Parental help with home buying has been around for generations, but the dollar amount of assistance has lately grown to huge proportions. A CIBC Economics study last fall said close to 30 per cent of first-time buyers received an average of $82,000 from their parents; in 2015, almost 20 per cent of first-time buyers received an average $52,000.
Parents got their kids into the housing market by helping them build down payments that otherwise might have taken years longer to accumulate. This made sense in a low-interest-rate world where prices were rising all the time and assembling a down payment was a bigger problem than affording mortgage payments.
Rising interest rates have upended this logic and made affording a mortgage the real challenge. If recent buyers aren’t already experiencing higher mortgage costs, they will in the months and years ahead. Monthly costs could rise by hundreds of dollars in households that are trying to deal with the soaring cost of groceries, gas and much more.
Any time I write about financial challenges faced by young adults, I hear from older boomers and seniors who endured the surge of inflation and interest rates of the early 1980s and say it was as bad as, or worse, than anything today.
Here’s how today’s world is unique: We’re just now emerging from a multiyear home buying frenzy built in large part on low interest rates that eased the way for continually rising prices. To an unprecedented extent, we had an intergenerational consensus that the biggest mistake you could make with houses was not to own one. And so, rising rates in 2022 are hitting a market where prices are up 44 per cent from two years ago.
Advice for recent buyers and their parental financiers: Do not obsess about prices over the next few years. Average resale prices are still ahead of year-earlier levels, but they’re falling fast from the peak in February. More declines could be ahead, but does that really matter if you bought a house to start or raise a family, and will likely remain for five-plus years?
Month-to-month mortgage affordability is by far the bigger issue for recent buyers. Monthly payments for some variable-rate mortgages have already risen. Other variable-rate mortgages are coming close to a point where their payments are adjusted higher. Up until now, changes have been in the background, with lenders using more of payments to cover interest and applying less to principal.
With a fixed-rate mortgage, you’re invulnerable to rising rates until renewal. It was no big deal to get a five-year fixed-rate mortgage five years ago for less than 3 per cent. Today, you’re looking at a renewal with a discounted five-year fixed rates close to 5 per cent. Prepare for payment shock, especially in the Ontario and B.C. cities where prices have averaged around the $1-million mark and outstanding mortgage balances can be huge.
Parents, help for your home-owning kids would most practically come in the form of cash for paying down a mortgage balance. Renewing a smaller mortgage takes the edge off higher mortgage costs. Cash assistance could take other forms – help with a mortgage payment, for example, or lightening the load on your children by helping to pay expenses like summer camp for grandkids.
The rule for helping adult kids with the cost of home ownership is the same as for providing a down payment gift. First, do no harm to your own finances. The book on the cost of being a parent does not have infinite chapters.
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