Studies show that the next generation is struggling to find affordable housing and many require financial assistance. According to the Ratehub 2016 Digital Money Trends Report, up to 45 percent of homebuyers across Canada are receiving help from relatives.
Share Your Knowledge and Experiences
You know the benefits of owning a home. You’ve probably been through the home-buying process and maybe even moved homes once or twice. The CMHC 2017 Mortgage Consumer Survey says that 57 percent of first-time homebuyers are most likely to look to a family member for advice. So now is the time to share your experiences and what you’ve learned with your child.
You can help them to understand the process and the responsibilities associated with buying and owning a home as well as determining what to look for in a home, setting realistic goals and budgets, and perhaps even providing financial support.
You might want to share your insights on picking the right realtor, what kind of property they might want, what insurances they may need, what neighbourhood they might live in, plus other considerations like city life vs life in the suburbs.
What Is the Real Cost of a Home?
As a homeowner you’ll know that the costs associated with buying a home, closing on it, moving—and moving in—can add up quickly. Help your child to identify and understand the true cost of buying and running a home. Consider discussing (or researching) the following, together:
- What are closing costs?
- Will they be hiring movers or renting a truck?
- How much are the legal fees or land transfer tax?
- Do they have a budget for furniture?
- What will the monthly costs be to run the home? Make sure to think about utilities, maintenance, property taxes and the dreaded unexpected repair.
The Down Payment
They’ll need a down payment of at least 5-10 percent of the price of the home. The source of the down payment can include their savings, using funds from an RRSP, or TFSA, or even help from friends or a family member.
Regardless of the purchase price, government regulations dictate that with a down payment of less than 20 percent they’ll require mortgage default insurance. These regulations may impact the size of (insured) mortgage that they can qualify for.
The size of down payment might limit the borrowing amount. They may need to plan on purchasing a less expensive home, save a larger down payment or try to eliminate all or most of their debt.
The amount of down payment will also impact the amount of interest your child will pay over the term of their mortgage. In that, if they’re borrowing less (because they had a larger down payment to contribute to the house purchase) then the interest charged would be based on that lower amount.
To help your family member save for a down payment, tell them about automatic-saving tools such as Save-Matic® or TFSA-Matic® to help them make regular, automatic contributions to their savings accounts.
For more budgeting and saving tips and tools, visit rbc.com/savingsspot.
Ways to Help Your Child Achieve Home Ownership
If you are in a position to help your loved ones with their homeownership dream here are a couple of things you could consider.
Giving a gift for their down payment
With the price of homes rapidly rising, it could take years before your child has enough money saved for a down payment. With this in mind, gifted down payments are becoming more common for first-time homebuyers, and upsizers.
If you want to provide a gift, all you need to do is to write and sign a Gift Letter (which an RBC advisor can provide for you) which states that the money does not have to be repaid. An additional advantage of a gift is that it is not counted towards the recipient’s capacity to pay their mortgage.
However, if you plan on gifting money for their down payment, you may want to also consider the tax implications of cashing out your investments or withdrawing funds from retirement plans like an RRSP. Speak to an RBC financial planner to build a customized financial plan that can optimize your savings to address both your retirement needs and their down payment.
Co-borrowing with your child
You can also help by co-borrowing with them. Your income and credit history will be used to qualify for the loan, and all applicants’ names will appear on the property’s title. Co-borrowing could help with their ability to get approved for a mortgage. By co-borrowing, your name and credit history will be on the loan and you will be responsible for it the same way you would be responsible for your own loan. .
We’re Here to Help
No matter where your child is in their homeownership journey, we’re here to help. There are lots of options available for families to help the next generation buy a home. An RBC financial advisor can help you weigh the pros and cons of different scenarios and choose the best one. When it comes time to buying, an RBC mortgage specialist can provide the expertise and guidance to ensure they’re making the right choices.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.