Parents are being called the “Sandwich Generation”, caught between helping their own children as well as their mothers and fathers, a consequence of living longer.
The days when parents’ greatest concern was paying for the kids’ college education have now morphed into helping them onto the property ownership ladder.
It’s amazing to think that almost a third of today’s young buyers are getting a handout or loan from their mom and dad.
Research by the CIBC (Canadian Imperial Bank of Commerce) says parental financial support was given to 31% of first-time home buyers, with an average gift of $115,000.
While this is an incredibly generous act, there can be significant downsides.
It’s worth exploring these:
- Your Savings: You never know what is around the corner even in the autumn years of your life. Large loans and gifts can exhaust funds that you may need down the track. Think health care. It’s a reality.
- Double Trouble: If you have more than one child, you’ll be expected to offer the same advantage again. If you use CIBC’s average, that’s now a minimum $230,000 hit to your savings.
- Relationships: If your child is in a relationship, or begins a serious partnership later in life, you may find your generosity going in a direction you had not anticipated. That is, the couple breaks-up and splits their assets 50:50.
- Legal Deal: You can insist on a legal agreement to avoid the above scenario, but now things start getting complicated. This complexity won’t reflect the simple act of kindness you had wanted to bestow.
- More Paperwork: If you offer a gift, the lender will require a letter of proof. Your money will not improve your child’s standing with the lender. That’s because the lender will focus on the equation of savings, spending record and income.
- Loan Agreement: You can strike up a loan agreement with your child, but whether it will stand up in court is another matter. Two things here: who wants to end up in court? And most lawyers will tell you what can be reasonably argued in court, not the decision the court will make.
- Possible Solution: You might ask your lawyer for advice about registering the loan as a second mortgage against the property. If it is sold, the loan must be repaid. Again, it doesn’t take much imagination to foresee the potential problems down the track.
- Tax Question: No tax implications come with gifting to children in Canada, as a rule. But you should take professional advice on this. The rules are different in America, so if there’s any potential implication involving the IRS, you need to look into this.
- Finally: Consider all the scenarios before opening your own branch of the Bank of Mom and Dad.