A few points to consider before agreeing to open up The Bank of Mom and Dad

1st November, 2019

Mark Ting says money can cause family tensions so tread carefully. In order to qualify for a mortgage, many potential homebuyers must rely on The Bank of Mom and Dad to fund their down payment.

I recently heard from a parent who wanted to help his son Alex to enter the housing market, but was unsure of whether it was the right decision.

My first concern is ‘affordability’ — not the son’s, but the parent’s. Many parents feel pressured to financially help their children but, before doing so, they need to be confident they can afford to give the money away.

In Alex’s case, both his parents had good pensions and a sizeable retirement nest egg. After crunching the numbers, I concluded it was financially feasible for them to provide a down payment to their son.

Family dynamics

My next consideration is family dynamics. Alex has a sister named Hanna, so I asked the parents how they thought Hanna would react to such a substantial amount of money being gifted to her brother. The parents suggested that they shouldn’t need Hanna’s permission on how they choose to use their money.

Although I completely understand and don’t disagree with the parent’s position, I do know from experience how money can cause rifts within families. If I was helping my own children with a down payment on a home, I’d want to see budgeting and saving initiatives on their end.

With that in mind, I recommended they discuss their plans with both children and ask them, not for permission, but for their thoughts on the situation. It could be a non-issue and Hanna might say, “It’s your money so do whatever you want with it.” Or, she could have a completely different, more negative, reaction.

It would be preferable to know her feelings upfront so that any concerns can be addressed, rather than risk the family’s harmony.

Loan vs Gift

If the family finds a property that meets their needs and the parents decide to help with down payment, I would structure the transfer of funds as a loan rather than a gift.

Assuming the parents are financially stable and don’t need to be repaid, they could loan the money to Alex at zero per cent interest with no fixed payback schedule. The parents could also have a stipulation in their will that upon their death, the loan is forgiven.

I recommend a loan as it safeguards the money in the case of divorce or if Alex gets sued. Alex, who is currently married, is using his parent’s money to help buy a home. If he gets divorced, the amount loaned as a down payment would not be included as part of Alex’s family assets.

The parents could ask for the down payment loan to be repaid before the house’s equity gets divided according to Alex’s divorce settlement. If a parent decides to help with a home down payment, financial expert Mark Ting suggests they structure the transfer of funds as a loan rather than a gift.

Some parents insist on putting their names on their adult children’s property, but in this case it wasn’t necessary. An alternative would be to put a charge on the house with the Land Title Office — similar to what banks do when they place a mortgage on property. By doing so, the parents would have an interest in the property, but not ownership. It also wouldn’t affect Alex’s ability to take advantage of his home’s principal residence tax exemption.

If I were in the position to help my children with a down payment, I probably would, but only under certain circumstances. I’d want to see budgeting and saving initiatives on their end. Not just for their down payment, but all the other aspects of home ownership such as strata fees, property taxes, utilities and upkeep.

I would have them begin with a small starter home as the costs are more manageable. Hopefully in a couple of years, once the home has increased in value, they can sell it and move up the property ladder.

However, if asked to pay the full down payment on their “forever” home, I would have no problem informing my children that The Bank of Mom and Dad is closed and will remain so until they bring more to the table.

Originally published in CBC’s Opinion section.

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