Mortgage rates are down. It's an excellent time for young people to get into the housing market-if they can afford it. Unfortunately, many young people don't have the financial resources to take advantage of the opportunity. Unless, of course, parents or grandparents are willing and able to help out with financing or sage advise.
Share what you know
The advice part doesn't cost anything. If you're a homeowner, you undoubtedly know about property selection, mortgage costs, and all the other aspects of home ownership. Share that information with your children and/or grandchildren. Discuss with them what they can afford, and what their various options are. Then let them make their own decisions.
Ways to help financially
If you have the resources available, you may wish to go further and provide financial assistance to help them buy that first home. There are several ways to do this that don't have to cost you a lot of money. Here are some ideas:
Provide money for a down payment. This can be either a gift or a loan, whichever you prefer. In many ways a loan is better, because it imposes a responsibility on the children to repay the money
The bottom-line cost to you of an interest-free or low-interest loan will depend on what other use you might make of the money. For instance, lets assume the buyer needs $25,000 for a down payment and you are using funds that otherwise would be invested in a five-year Guaranteed Investment Certificate (GIC) at 9.25%. You're in a 45% tax bracket:
- Case one: Interest Free Loan. You're giving up $2313 a year in GIC interest. However, you'd pay the tax department $1041 of that in tax so you're actually out of pocket $1272- a little more that $100 a month
- Case two: Low Interest 5% loan. You're giving your child a loan at a very attractive rate. But the after tax difference between your return on this loan and the GIC investment is only $584 a year-about $49 a month.It doesn't seem like a high price to pay to help the children get started
- Become a joint owner. If you'd like to help the children financially and perhaps make some tax-free profit as well, arrange to become a joint owner of their home. This will enable you to share in any capital gain when the property eventually is sold. If the $100,000 capital gains exemption still is around at that time, you may be able to shelter your entire profit
- Just make sure the arrangement is properly drawn up and reviewed, and is seen to be fair by everyone involved. You don't want to end up driving a wedge between you and other family members
- Buy the house and rent it to them. Purchase the property and rent it to the children with an option to buy. If you charge fair market rent, the tax department should allow you to deduct all appropriate expenses, even though you're not dealing with the children at arm's length
This strategy will enable the children to move right away into the type of home they want, even if they don't have the down payment saved. They can exercise their purchase option when they're financially able
If you decide to use any of these strategies, be sure to obtain legal advice before going ahead, to ensure everything works out as expected. You don't want to run into tax problems or family arguments down the road.
With careful planning and close consultation with your children or grandchildren, you can help them get into their first home now - at minimum cost to you.