By Karin Mizgala, co-founder and CEO Money Coaches Canada
Buying a home, especially for first time buyers, has become increasingly challenging over the last decades. In 1985, according to the Toronto Estate Board, the average home in the city sold for $109,094 and the average Torontonian was earning $31,956. That’s means if you put your entire salary towards a home, it would have taken you 3.4 years to pay it off in 1985.
According to Statistics Canada the median salary for a Toronto family in 2017 was $83,000. Assuming a 2.5% average salary increase, that would be $89,000 in 2020. That’s a significant jump from 1985, but according to the Toronto Real Estate Board the average price for a detached house in the city of Toronto in 2020 is $1,163,000. So despite that increased annual wage, putting your families’ entire salary towards your home, it would now take 13 years to pay it off.
It’s true that cities like Vancouver and Toronto are known for having high housing prices, but even smaller cities like Ottawa are becoming more challenging for first time buyers. A shortage of available houses in that city has created a bidding war situation, with highly desirable properties often selling far above the asking price.
Young adults, many of whom are already carrying an average of $25,000 in student debt, look at the high cost of entry to the market and wonder how home ownership will be possible for them. And many of them are turning to mom and dad for help.
Parents, often homeowners themselves, know that getting into the housing market can provide their child with stability, security and financial growth, so it’s very tempting to want to help them realize their goal.
But help of this sort doesn’t happen in a vacuum, it can have a huge impact on your life and your relationship with your kids. It’s vital that you answer these three questions before you start visiting open houses.
1. Can you afford it?
Sacrificing for our children is second nature to many parents, but this isn’t the same as wearing the same worn winter coat for another year so you can pay for your child’s hockey fees. Will helping your kids jeopardize your retirement plans? Will it deplete your emergency fund or decrease your financial flexibility and increase your worry? Will it impact goals you have; like buying a cottage, getting a new car, or travelling?
You may be willing to sacrifice those things now, but how will you feel in two years when your child goes off on a vacation of their own? Will you resent having given up your own adventures?
Will this investment be a one-time ask, or just the beginning? What if they have trouble making mortgage payments; have you set a precedent for helping that will be an ongoing stress on your finances? Every homeowner knows that the upkeep of a home is endless; will turning to mom or dad become a default plan if the roof leaks or the foundation cracks?
If you have other children, can you afford to offer assistance to them also? What if the other kids have different goals? Do you support those? How do you keep things fair?
Before you make a decision of this scale, it’s vital that you have an updated comprehensive financial plan of your own. The last thing you want is to end up dependent on your kids down the road and finding you have to move into the house you helped fund!
2. Is home ownership your idea or theirs?
Home ownership is often seen as a rite of passage, something that everyone should aspire to. As parents we may project this definition of success onto our children, or we may see our friends’ children taking this step and feel like ours should follow suit.
But homeownership has its drawbacks too. It does limit financial flexibility and freedom. Is it the right time in his or her life? It’s a decision far more about life stage than age.
If the idea of home ownership is coming from your adult child, how committed are they to the process? Have they researched the market? What is driving their desire to buy? Are they ready for the responsibility?
But whether home ownership is their idea or yours, one of the biggest challenges to mixing money and family are the hidden strings that tangle-up and cause all sorts of rifts and resentments. The parent/child relationship has many emotional undercurrents as it is, adding money can have disastrous effects. Will you feel you have more right to influence their other financial choices? Will you cringe if you see them spending money on things you consider frivolous?
Be honest with yourself. Can you step back and give this money without feeling it gives you a right to comment or interfere in how your adult child manages money in general? If you are unable to be a dispassionate banker and act instead as a parent handling out an allowance, this “help” may do terrible damage to your relationship. Even a child who is grateful for the financial assistance will resent feeling controlled. For this to work you need to have confidence in their financial decision making.
Which brings us to the final question:
3. How well does your child manage money now?
We have to respect that our children are adults now, and not view them through the lens of their teenage behavior (like that dog they said they would take care of, but then walked by it far more than they walked with it). But at the same time, if they are going to be using your money, you have a right to consider how responsible they are being in other areas of their life.
- Has your son or daughter only recently decided to join the world of homeowners, or is this a goal they have already been saving for? If so, how much have they saved?
- Do they currently have other debt, such as school loans, car loans, or credit cards? How well have they been handling repayment?
- How stable is their employment? Can they afford not only the mortgage payments, but the other costs of home ownership—property taxes, maintenance, insurance—as well?
- Do they have a partner who can contribute equally? How strong and stable is the relationship?
If your son or daughter struggles with money (perhaps that is why they have come to you for assistance), it may be kinder to gift them time with a financial planner who can help them get a handle on their finances, before they take on the big step of home ownership.
The Bottom Line
When it comes to our children, the heart often overrules the head. If you’ve given serious consideration to these questions and still want to go ahead, your best bet is to structure your contribution as a loan. It can be a low interest—or no interest—loan, with a repayment schedule that is comfortable for everyone. Or if you’re in retirement and have the means, you could set it up as an advance on their inheritance.
You can use a lawyer or just spell out the terms in a simple written document. The objective is clarity and accountability for both parties. It’s important that the whole family is clear and onboard with the decision. Open communication will decrease the potential for conflict and set a precedent for how to handle financial assistance to other family members as well.