With the high cost of buying real estate in the lower mainland of BC what is the best approach in helping your children buy their first home. One of the first questions may be “Should I help my kids buy their first home?”
A recent article in the Financial Post looks at how you may answer that question for the needs of your specific situation. http://business.financialpost.com/2013/12/14/should-you-help-buy-your-kids-a-house/
If you have taken a look at your situation and determined you want to look at options in helping your children buy their first home, consider these:
1. Gift money for the down payment. Any funds you gift will be confirmed with a gift letter provided by the lender. The letter, signed by the giftee (home buyer) and the giftor (family member) will confirm the gifted funds are not to be repaid. The funds will be deposited from the family members’s bank account into the home buyers bank account and proof of that transfer shared with the lender in addition to the gift letter in order to be allowed for use as a down payment. Take note of the legal position in the Financial Post article or talk with your legal counsel.
2. Co-sign or guarantee the mortgage. This is where a family member gets involved in the application for financing to support the buyer in securing a mortgage. Depending on whether there is a lack of income or weak credit to qualify the family member may be on title to the property (co-signor) or as guarantor not on title. To learn more—http://mybcmortgage.ca/co-signor-or-guarantor-for-a-mortgage/ or discuss with your lawyer on the rights and responsibilities in these situations.
3. Loan the money – A simple approach that may create a win-win for everyone is to loan the buyer the money. For example, the family member usese equity from your home equity line of credit and the buyer pays the cost of borrowing in addition to their mortgage payment. Upon sale or refinance of the home in 2-5 years the money loaned for the down payment is paid back. If the loan was $10K the monthly payments would be $20. If the family members offers a dollar for dollar match the buyer may save $10K and receive the loan of $10K as incentive to save towards the down payment and buy the home a year sooner than they could on their own – Win-Win.
Note: The loan payment would have to be confirmed in writing and the amount included in the application as a monthly payment towards debt servicing to qualify for the mortgage. So this may work for some buyers and not for others.
To fully understand how to qualify for a mortgage and the pros and cons of helping your children buy their first home, consult professionals–your mortgage broker and lawyer.