How to Help Your Children Buy a House

| Buying

With lifetime rental becoming the new reality for so many young Ontarians, more parents are offering financial assistance for their “kidults.” If you’re one of those parents, here are a few ways to help your grown children buy a home.

Family Loan: The Bank of Mom & Dad

A family loan for a down payment is the most doable approach for the average parent. Here are a few things you should know about a parent-to-child loan in Canada:

  • Personal loans must be included on mortgage applications, which impacts your child’s debt-to-income calculation.
  • An interest-free loan has no tax implications but negatively impacts your wealth growth.
  • Charging interest is a little more awkward and must be claimed as part of your income.
  • Your child can’t deduct the interest for a personal loan UNLESS they are purchasing an investment property.
  • Parents in higher tax brackets lending money for an investment property should be aware of subsection 56 (4.1) of the Income Tax Act, which could put you at risk if the government suspects you of tax avoidance.
  • Your will should address any money owed at your passing, either automatically forgiving the loan, deducting the loan from the portion of your child’s inheritance, and/or requesting the loan be repaid to your benefactors.

Pros:

  • You can assist your kids without a total loss
  • You can charge interest to reduce the impact on your wealth

Cons:

  • You might never see the money again
  • You have to claim interest on your taxes
  • If the loan is used for an investment property, higher-income parents might face tax scrutiny
  • Risk of mortgage refusal
  • Possible estate complications

Do you have more questions about buying a home in Toronto? Whether it’s your first home for yourself or you’re helping out your kids, here are some posts you might find interesting:

How To Gift a Down Payment for a House

Gifting a down payment is not a simple matter of transferring money to your kids. As we mentioned above, lenders aren’t fans of down payment loans, so they need proof the money is a gift and won’t impact your child’s debt obligations. There are a few things you need to do based on mortgage down payment gift rules in Canada:

  • Lenders require a gift letter for down payments stating repayment is not required for the gift. (Many lenders have templates for letters to make it easier)
  • You either have to provide the lender with proof you have the funds available or a statement showing the amount transferred to your kid’s account.
  • Full deposits are preferred over multiple transfers so lenders can identify the source of the funds.
  • Borrowed money is often not considered a gift by certain lenders, which can lead to mortgage denial.
  • Most lenders want the funds at least 15–30 days before closing and can even deny the mortgage if the funds arrive any later than that.

Pros:

  • Your child has no financial obligation to return the money and can afford the best possible home.
  • No tax implications

Cons:

  • Your child has no financial obligation to return the money.
  • Borrowed funds are often not accepted by lenders.

Buying your first home (or helping your children), is an exciting event! But with all new things, you might have questions. Here are some more posts you might find helpful: 

The Risks of Cosigning a Mortgage

Kids who don’t qualify for a mortgage might ask you to cosign the loan. This is the riskiest approach, as you are obligated to take on the mortgage payments should your kids default. Not only are your finances at risk, but your relationship as well. Here’s what you need to know:

  • You have to pass strict mortgage requirements, so you need practically zero debt and proof of steady income to qualify.
  • Your child’s mortgage debt is added to your own, which can impact your credit score and ability to access loans for yourself.
  • When your child sells there are capital gains tax implications of cosigning a mortgage in Canada, as you have to pay taxes on 50% of the gains on your share of the home UNLESS you have a bare trust agreement stating you have no beneficial interest in the property.
  • Your child can remove your name at any time once their finances become more secure.

Pros:

  • You can help your child qualify for a mortgage
  • Your name can eventually be removed from the mortgage

Cons:

  • You can face severe financial issues and tax implications
  • You might not qualify
  • Your relationship is at risk in the case of defaults

Bonus Tip: Guarantors

A guarantor is like a co-signer in that you cover your child’s mortgage if they fail to pay what they owe. However, there’s a little more wiggle room in that you don’t take on the debt until your kid completely defaults and is about to lose their home.

The Toronto real estate market moves lightning fast. Here are a few posts to help you navigate the Toronto real estate market as a homebuyer: 

What is Co-ownership?

A co-ownership agreement allows you to pool your resources to purchase a home with your kids. You can also consider an undivided co-ownership agreement where you each have your own debt. This is a smart strategy, as it protects each other in case someone defaults so your share can’t be seized by the creditor. Aside from the mortgage, some considerations when drawing up a co-ownership agreement include:

  • Who gets what space, i.e., the main floor versus the basement suite?
  • Shared spaces such as kitchen and bathroom
  • An exit strategy such as the first right of refusal if someone wants to sell
  • Splitting maintenance and utility costs i.e. maybe having a joint account you contribute to for repairs
  • Agreement on valuing property shares
  • A notice period for major changes

Pros:

  • Offers multigenerational support for child or parent care
  • Can include separate or shared living arrangements
  • Combines financial resources to help secure a higher mortgage and better-quality home

Cons:

  • Can cause tension, especially between in-laws
  • Requires clear agreement to avoid financial stress on one party

Ready to help your children buy their first property? Work with one of the best Toronto real estate teams. Call 416.291.7372, email hello@christinecowern.com to get in touch with us today!