This article originally appeared on RBC Wealth Management.
It might seem inevitable that your children will need help buying their first home. Real estate prices, rising mortgage rates and the cost of living are making it less affordable than ever for young people in Canada to own property without some financial assistance from their family.1
Too often, a financial decision is made quickly and under pressure. Of course you’d love to help your child win a bidding war for their dream home, but at what cost to your own retirement plans?
“Parents don’t always get to spend enough time considering the different ways they could help,” says Tony Maiorino, vice president and director, head of RBC Family Office Services at RBC Wealth Management in Canada. “A young couple may want to buy a house, are short $50,000 and then ask at the 11th hour, ‘Can you lend it to us?’ A parent can feel pressured and put on the spot.”
“Going through a planning process first is going to set the groundwork for having that conversation,” says Maiorino. “If you have a financial plan and are thinking of giving your kids, say, $50,000 each over 10 years, your advisor can model it to see if you can afford it, and how. If yes, you can walk out knowing, ‘I can do this.'”
Add housing gifts to your financial planning goals
It’s becoming more common to see families allocate gifts for home-buying in their financial plans, says Allison Marshall, vice president of High Net Worth Planning Services and Financial Advisory Support, RBC Family Office Services at RBC Wealth Management in Canada.
“I’m a Gen Xer. When my parents were raising me, saving for my post-secondary education was their focus. It still is, for most of our clients; but today, there’s an added goal of wanting to help children be able to purchase a home in the future,” says Marshall.
“We talk about what makes sense from a tax perspective as well as a family law perspective—things a parent may not think about, like what happens to the gift if there’s a divorce. It’s also important to understand the impact of any gift on your retirement lifestyle,” she says.
Give money to invest in a First Home Savings Account
One way to stretch a financial gift is to guide your adult child to invest the money and claim their first-time homebuyer’s incentive.
The First Home Savings Account (FHSA) was launched by the federal government in April 2023, allowing prospective first-time homebuyers to save tax-free.
You can’t contribute directly to someone’s FHSA, but your adult child can deposit up to $8,000 per year into their account, to a lifetime maximum of $40,000.
“One of the features of these accounts is that parents can gift their child—or grandchild—the money, tax-free, for them to invest.” says Marshall. “Later, when money is withdrawn to purchase a house, there is no attribution back to the parent or grandparent,” making this a practical way to transfer wealth.
As with an RRSP, FHSA contributions reduce the account holder’s taxable income, and those deductions can be carried forward to a later tax year. And like a tax-free savings account (TFSA), income and withdrawals aren’t taxable, so long as funds are used for a home purchase.
This complements use of the Home Buyers’ Plan (HBP), allowing up to $35,000 to be withdrawn from an RRSP tax-free for a home purchase.
By taking advantage of both the FHSA and the HBP, an individual could save up to $75,000 to use toward a first home, plus any growth in the FHSA.
Share your roof as a way to boost your kids’ savings
If it fits your lifestyle, welcoming adult children to live rent-free in the family home is another way to lend support.
“This can be a non-financial option to help them save for a down payment,” says Maiorino.
With going rates for a one-bedroom rental ranging from $2,800 in Vancouver to $1,800 in Halifax, the money saved on housing, utilities and food adds up.2
“That’s an opportunity for a working couple to save thousands a month,” says Maiorino. “It could be close to $50,000 in just one year, if they’re disciplined about taking what they would have paid for those expenses and putting it into a savings vehicle. You’re giving them $50,000 in value for maybe $5,000 or $6,000 in additional costs.”
Give a down payment or a forgivable loan
A recent survey reported that 35 percent of first-time homebuyers across Canada received a lump-sum payment from a parent or relative.3 And in pricey Ontario, the Ontario Real Estate Association found that about 40 percent of parents had helped children (ages 18 to 38) buy a house.4 The amount averaged $71,000 as a gift, or a loan of $41,000.
“I’m personally a huge fan of the ‘lend; don’t give’ approach,” says Maiorino, who sees parents offer home-buying help through a formally documented loan.
“They’re saying, ‘We want to help our children but do it in a way that gives us some flexibility and also protects us.’ It’s not an equity ownership—the parents own nothing in the house—but they do have a debt against the home,” he says.
Plus, the idea of repaying a loan may help the family stay grounded about the value of money.
“Even if it’s your ultimate objective to give them the money and forgive the loan, just thinking that their parents might ask for their $100,000 back can change the dynamic of how they choose to live. Maybe they’re not going to buy that expensive TV or replace the appliance that doesn’t need to be replaced; they’re conscious of wanting to pay the money back.”
“You can always eventually say, ‘Happy holidays! We’re forgiving the loan!'” says Maiorino.
1 “Brighter Days Ahead As Home Ownership Costs Go Through the Roof.” Rbc.Com, 29 Mar. 2023, https://thoughtleadership.rbc.com/brighter-days-ahead-as-home-ownership-costs-go-through-the-roof/ .
2 “Rentals.ca June 2023 Rent Report.” Rentals.Ca, Urbanation, 1 June 2023, https://rentals.ca/national-rent-report .
3 “Down Payment Dilemma: Canadian First-Time Homebuyers’ Fear of Falling Short Is Escalating.” Newswire.Ca, Royal LePage Real Estate Services, 22 June 2023, https://www.newswire.ca/news-releases/down-payment-dilemma-canadian-first-time-homebuyers-fear-of-falling-short-is-escalating-869359647.html .
4 “Four in 10 Parents of Young Ontario Homeowners Financially Helped Their Child Achieve the Dream of Homeownership.” OREA.com, 22 Feb. 2022, https://www.orea.com/resources/media-room/Press-Releases/February-22-2022 .
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