Housing affordability in Canada is always a debated topic. On one side of the argument you have the older generation, who are already home owners. This population has been able to add to their wealth simply by owning the home in which they have lived for decades. On the other side of the argument you have the younger generation, who are trying to achieve home ownership in one of the most expensive housing markets in the world. It can seem like an absolutely daunting experience to start to save for a down payment while you are paying rent and your other bills.

I thought that the best way to present this data in the form of a line graph. I sifted through as many databases on the internet as I could in regards to historical figures. There is some variance in the numbers across multiple databases but the trend remains the same across the board; total before-tax household income is nowhere near keeping pace with the incredible pace of growth in Canadian real estate.

A lot of media attention has been given to “The Bank of Mom & Dad” lately and the fact that “roughly 30 per cent of first-time homebuyers and nearly 9 percent of existing homeowners received financial help from family this past year to purchase a home.” “First-time buyers received an average gift of $82,000, while “mover-uppers” were gifted a whopping average of $128,000 in September 2021.” Families are looking to give their children a helping hand to start their life and it can be a huge help, like starting a marathon by being shot out of a cannon rather than the traditional method of jogging with the pack. It can be a huge help but that help doesn’t come without risks. There are several ways that all or a portion of those funds can vanish so I believe that knowing and understanding the risks before hand will help determine whether you are willing to take that risk.

Risk 1: Are you sure that you will have enough for the rest of your life? This is probably the greatest risk of anyone in retirement today and I’ve talked about this in my past article (The Invisible Thief). People are living longer than ever and inflation will be the largest drag on their portfolio over the rest of their lifetime. More and more pensions are becoming non-indexed or are based on employee contributions (like defined contribution pension plans) so it will be up to you to ensure that your income accounts for inflation. With the average Canadian family earning around $100,000 gross per year, Canada’s long-term average inflation rate of 3.52%, and the average length of retirement of around 20 years, you better be prepared to double your income over those 20 years to maintain your purchasing power.

Risk 2: Once the gift has left your bank account and is provided to your child then it becomes their property. This means that your funds won’t be protected if your child (or their spouse) should have any issues with creditors or they experience a marital breakdown. One option to minimize the proportion of funds that the creditors or an angry spouse can get is to co-sign on the mortgage but it still may result in the home being sold if there isn’t enough funds to satisfy the court order. Co-signing on the mortgage can also result in the property losing a portion of its principal residence designation for your child, which is one the greatest gifts of home ownership in Canada, so this may not be the best option.

Risk 3: Fairness remains a big thing when it comes to parents treating children equally. If you have decided to help one child now then you can add a clause in your will that will consider any gifts provided during your lifetime as part of their portion of your estate upon your passing. This is known as a hotchpot clause.

Rather than an outright gift, how about using a promissory note? A promissory note is an enforceable promise to pay back a loan or debt. The note will have a repayment schedule, provisions for interest and the applicable rate, consequences for missed payments, and parents may even wish to register their interest on the title of the child’s home. All parties involved will need to sign the note and it should be witnessed and/or notarized. This ensures that your interest in the property remains your interest with legal documentation to support that. If your intention is to eventually forgive the note in the future then this is something that can be addressed in your will. You should always seek legal counsel before any money changes hands and ensure that you understand the risks involved or if any changes need to be made to your estate documents.

Want to chat about it? Email me at info@financerx.ca