Helping your child with their first home
By Ken Soderquist, CFA, CFP 12 April 2023 4 min read
Written by Ken Soderquist on behalf of Private Investment Counsel (PIC), ATB Wealth’s discretionary portfolio management team. PIC specializes in working with ATB’s high-net-worth clients.
Many parents wonder if they should help their children with the purchase of their first home. Even if they’re in a solid position to offer financial support, it’s not always a clear cut decision for parents, as there are many factors to consider.
For one thing, it can be a lot of money. With the average home in Alberta costing $447,000, and a down payment of 5% for houses under $500,000, the minimum down payment for the average home would be $22,350. Additionally, mortgage loan insurance through Canada Mortgage and Housing Corporation (CMHC) is typically required by lenders when homebuyers make a down payment of less than 20% of the purchase price. Given a low down payment of 5%, a $16,986 insurance premium would be added to the mortgage above. The monthly mortgage payment would be approximately $2,600,1 and assuming a gross debt servicing ratio of 35%, your child would have to earn over $89,000 per year to qualify. These costs can be prohibitive for someone just starting out in their career and wanting to get into the real estate market. So it’s easy to see why a parent would consider helping their child.
But, should you help? Drive, financial discipline, and independence can be the outcome of saving for the down payment, and striving to earn more. There can also be satisfaction and a sense of accomplishment in paying off that debt. These life lessons and experiences are invaluable.
If you do want to help, there are a couple of points to keep in mind:
- Do not put yourself at risk. The parental urge to help is strong, and, as mentioned above, the down payment could be large. You will need to make sure you understand the impact of such a gift on your long-term financial plans.
- Most financial institutions will require you to sign a letter stating that the money you’re giving your child is a gift, and that they are not required to pay back the funds.
- Be careful not to make your child “house poor.” If you help too much, it might be tempting to purchase a more expensive home. The larger and more expensive a home is, the larger the taxes, insurance and annual maintenance costs.
- Beware of co-mingling the funds. This is often overlooked by parents. They may give their children funds for a down payment, only for that child to purchase a home jointly with someone else. This has the potential to create a tricky situation if that relationship ever sours.
- Unintended changes in family dynamics are hard to predict. Gifts to children, even though they are not required to be paid back, have the potential to impact family relationships. Be sure to have thorough conversations around the gift to ensure everyone is clear that the funds do not need to be paid back.
If the idea of a large gift is no longer appealing, there are government programs to help first-time home buyers.
The RRSP Home Buyers' Plan (HBP) has been in existence since 1992. This plan allows first-time homebuyers to withdraw up to $35,000 from their Registered Retirement Savings Plan (RRSP) on a tax-free basis. The funds then have to be paid back to their RRSP within 15 years and are interest free. The first payment begins the second year following the year of the withdrawal. For example, if you withdrew $22,350 from your RRSP through the HBP in 2023, $1,490 would need to be paid back in 2025.2
The Home Buyers’ Plan provides first-time home buyers access to interest-free money with a reasonable repayment plan. That said, it does have its drawbacks. There is a potential cost to future retirement savings. When funds are withdrawn from an RRSP, you lose out on the opportunity for those funds to grow tax free. For instance, if your child has $30,000 saved in their RRSP, and withdrew the $22,350 through the HBP, the value of the RRSP at the end of the 15-year repayment plan, at 6% compounded annually, is $54,115. This compares to $76,211, if they did not withdraw the funds. The difference in value is $22,096. Assuming they do not retire for another 20 years, that $22,096 could represent $70,864 of lost RRSP savings.3
A new savings program for first-time homebuyers, the Tax-Free First Home Savings Account (FHSA), will be available later this year, as announced by the federal government in its latest budget. The plan offers first-time homebuyers some great benefits without having to sacrifice the growth of their retirement savings.
The FHSA accounts combine some of the best aspects of the Registered Retirement Savings Plan (RRSP) and Tax-Free Savings Account (TFSA). Similar to an RRSP, contributions to the plan are tax deductible. The maximum annual contribution is $8,000 with a lifetime contribution limit of $40,000. Similar to a TFSA, qualifying withdrawals come out on a tax-free basis. Funds will have to be used by Dec. 31 of the 15th anniversary of opening the account, or when the individual turns 71 years of age.
If the funds within the FHSA remain unused, there are opportunities to transfer the funds into an RRSP or RRIF on a tax-free basis. If neither of these is possible, the funds could be withdrawn and included in their taxable income.
Again, deciding on whether to help your child purchase their first home is a tricky decision. It combines both financial and personal factors. Parents know their children the best and the right decision should align with your family values, and strike a balance between helping them and reinforcing financial independence. If you are unsure, have a conversation with your investment counselor. They are familiar with the government programs that are available, as well as other options that can help your child and protect your interests.
You may also be interested in:
Your complete guide to buying a home in Alberta
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Passing financial sense to the next generation
Teaching your kids about money can ensure they make smart financial decisions.Read article
Planning in advance to fund your estate goals
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$441,636 mortgage over a period of 300 months at an interest rate of 5.14% results in a monthly payment of $2,603.89
$22,350/15 years. This amount is payable before the first 60 days of the following year.
Future value of $22,096 at 6% for 20 years.
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