How can I help my children become homeowners?

With rising housing markets, it can be very difficult to purchase a home without some financial help. In a lot of scenarios, parents are stepping in to assist with the down payment, making it possible for their children to become homeowners. There are a few different ways this can be done and this video summarizes the options available as well as the implications on the money in the event of a divorce.

Video transcript

As the housing market becomes more unaffordable for young Canadians, it’s no surprise that parents are stepping in to help. This is what we like to call “the bank of mom and dad.”

In most cases, parents are helping their children with the downpayment and there are generally three ways they do this:

Gifting the money
Loaning the money
Stepping into the role of private lender to set up a second mortgage

It’s important for parents to consider the scenario where their child may get divorced. This will affect what happens to the money, and if not discussed ahead of time, can create a lot of conflict. Let’s go over some of the options.

Gifting the money

Gifting the money is the most simplistic way to help with a down payment. But in the event of a divorce, any equity in the home will be split evenly. This can create an unfortunate situation for the parents and may not be what they desired.

Loaning the money

Parents can choose to draft an agreement and loan the funds. This will provide some protection for the parents. The key is to set up a proper and legally binding loan. It’s advised to consult a lawyer when doing so. If not set up correctly, the law is likely to treat the loan not as a loan but as a gift.

Setting up a second mortgage

In some cases, a real estate lawyer may set up the loan as a second mortgage — payable after the bank’s mortgage. The parents will have a valid claim to the property. Having a second mortgage may be problematic to the child as it increases their debt obligation, which can affect their ability to qualify for a mortgage. It can also be an issue as many lenders don’t permit a second mortgage.

The benefits of having a plan

No matter how solid the relationship may seem, it never hurts to have a plan. It’s a good idea to have the couple sign a marriage contract or cohabitation agreement. It’s important to create clarity and ensure everyone is on the same page.