Wednesday, April 29, 2015
One of the biggest ways parents helping kids is with a down payment for a house or condo. Here’s how to keep emotions out of the mix.
By: Adam Mayers Personal Finance Editor, Published on Mon Apr 27 2015
When parents lend money to kids it can tie families up in knots, creating jealousies and triggering feuds that may never be resolved.
That’s because the situation is fraught with emotion, becoming as much tied up in the familial relationship as it is about the business arrangement at hand. That’s why mixing feelings with finance is such a difficult thing.
One of the biggest ways parents help kids is with the purchase of a first house. For many, it is a way to pass on good fortune and give young adults a leg up. Anyone who bought a home in the GTA in the past 25 years ago has done very well. Paying it forward is rewarding.
A study sponsored by the Bank of Montreal shows how the trend is accelerating. For first-time homebuyers, the Bank of Mom and Dad is the go-to lender for a down payment.
Pollara Strategic Insights found that 42 per cent of first-timers are depending on some family help, up 12 percentage points in a year. That support is equal to 12 per cent of the cost of a home, or an average $37,500 a year.
A study by the Canadian Association of Accredited Mortgage Professionals (CAAMP) last fall reported the same trend, though less pronounced. CAAMP found that 18 per cent of first timers are relying on family help, with 11 per cent getting the money as a gift and 7 per cent as a loan.
If family financing is in your home-buying cards, here are some things to consider:
Gift or loan? If it’s a gift, then there are no strings attached. If it’s a gift against a future inheritance, it’s worth making that clear and recording it, so everyone know, says real estate lawyer and Star contributor Mark Weisleder.
“The main thing is to get it in writing,” he says.
Secure the loan: A loan will mean some form of security, likely a second mortgage registered on title. The bank will have to know about the family loan and approve.
Parents may also ask for a promissory note as proof of the loan and secure the loan against title. The loan, plus interest, could be repaid in full later, or never, but at least it’s on record. Weisleder says a promissory note gives parents protection if things later break down. Maybe the couple splits up, or lose jobs in a downturn and the house has to be sold.
Joint ownership: In some cases, where the children, or couple’s income is too low to meet bank financing requirements, parents are guaranteeing the mortgage offering their own income as security.
In this case, the bank may want the parents on the title to the property and to sign the mortgage indicating their share of ownership. It may be as little as 1 per cent, but this still leaves them on the hook to carry everything if the kids default.
Getting the money back: It can get complicated when parents want out. They can sell their interest to the kids, or give it back, but they would have to tell the bank and do it properly. Otherwise they could be in default of the mortgage, Weisleder says. Another option is to leave the stake to the kids in a will.
There’s nothing more rewarding than helping your kids, especially as a way to pay forward the same help you might have received all those years ago.
The trick is to leave emotions at the door. Discuss the implications and do it in the open to avoid bad feeling later. Above all, get the legal help you need.
Where 1st-time buyers get down payments
Bank loans: 27%
Gifts from parents: 11%
Loans from parents: 7%
Loans from employers: 1%
Source: CAAMP, Nov. 2014
Thursday, April 2, 2015
Danielle Kubes, | Special to Financial Post | March 25, 2015
You’ve cut back on lattes, taken a soul-crushing job on Burrard Street or 2nd Street SW, and borrowed from mom and dad. Congrats! You’re ready to put down a chunk of cash to cover the 20% downpayment on a property. But don’t make newbie mistakes, like trusting your bank to look after you. “The reality is that best rates are not always offered up front,” says mortgage broker Atrina Kouroshnia, 29, of Lavarates.ca in an email.
And don’t forget to look into subsidies, discounts and programs like the Home Buyers’ Plan for first-time buyers. Here’s what you need to know before you sign on the dotted line.
1. Putting every last cent into a downpayment
Hold on just a second. Tempting as it is to pour all your savings into a home, it may not be the best idea with today’s crazy prices.
“For our parents, it was normal to take out a $200,000 to $300,000 mortgage, whereas now first-time home-buyers regularly borrow $700,000 to $800,000,” says Brandon Wasser, a 29-year-old agent with Royal LePage in Toronto.
Should you divorce, or your car breaks down, those monthly mortgage payments may be impossible to meet. “I’ve seen people buy a place, lose their jobs, and they have to sell quickly because they can’t afford the monthly payments,” Mr. Wasser says.
Solution: Set aside some money. Mr. Wasser recommends socking 6 to 12 months of living expenses in an emergency fund.
2. Rushing to buy a condo, when you really want a house
Millennials may be delaying children, but we still want a few eventually. Or at least a big dog. Unfortunately, both require space to run around and slobber, which means most of us see boxes in the sky as a mere stepping stone to a house. But starting to ascend up that ladder may be riskier than staying put and continuing to save.
Beware: if you buy a condo and it fails to significantly appreciate, or the monthly payments prove too high to also save, you’ll have to ditch or delay your dreams of a backyard.
“Look at the street activity, look at the areas it’s in. Is it an upcoming area? Is there a stigma attached to it that could affect the value negatively?” Mr. Wasser says.
Solution: Mr. Wasser says don’t put a short-term investment ahead of long-term goals. “People a lot of times are looking for a deal, but in a hot market,” he says, “there are no deals.”
3. DIY property searching
Mr. Wasser says Millennials often search on MLS, find a property they like, and contact the agent pictured. Oops! That’s the listing agent, who works on behalf of the seller. You end up telling him what you can afford and are willing to pay, which is information he’ll pass along to the seller — hurting you in negotiations.
Solution: You don’t have to stop searching MLS addictively under your duvet late at night, but hire a realtor first. “That agent will now be in a relationship with you, where they have legal obligations to you.” Mr. Wasser says. “Everything you say to them is confidential.”
4. Conflating online calculations with reality
Heartbreak for twentysomethings usually consists of a flaky Tinder date. But Millennials won’t experience true heartbreak until they bid on a perfect place, only to have the offer fall through in financing. Don’t trust online calculators to tell you how much you can afford; they don’t account for things like your credit score, which can affect your mortgage rate.
Solution: “Go to a bank, go to a lender,” Mr. Wasser says. “Find out what you will be approved for.” And check that credit score.
5. Thinking what a bank will lend you is what you can afford
Until now you’ve had a cellphone bill, a hydro bill and some student loans. When you buy a property you may wrongly assume you’re only adding a single extra bill — the mortgage, to that list. “There are lots of costs that lenders don’t factor in when determining what you can comfortably afford,” Rob McLister, founder of RateSpy.com, writes in an email.
If you fail to budget for additional expenses — Home Depot trips, insurance, property taxes — you may soon find yourself back in your bed-bug infested basement apartment.
Solution: Mr. McLister says don’t focus on how much you’re able to borrow, but how much you should borrow. Add up all your current living expenses, plus the extra expenses associated with home-ownership, then tack on at least 5% to 10% of your monthly income for savings. Circle that number in red, because that’s what you can afford.
6. Over-trusting your mortgage adviser
As a young, inexperienced home buyer, you’re more likely to depend on what the professionals tell you — but never assume any mortgage professional knows best, is lending at the highest rates, or is giving you the most accurate information.
Solution: “As Ronald Reagan used to say, ‘Trust but verify’,” writes Mr. McLister. “Verify that their rates are competitive, that they have disclosed all potential downsides of the mortgage they’re recommending, that they gave you a competitive analysis on why their recommendation is optimal and that they are experienced in the industry,” he says.
7. Not considering rate risk
Interest rates are like Canadian winters. A few good, warmer than average years, barely any snow, you think global warming’s working, and then boom! Polar vortex. “Too many new buyers see a tantalizing rate like 1.99% or 2.49% and forget that rates can jump, fast,” Mr. McLister says.
Solution: “Never get a mortgage without considering how your payments could change at renewal, or at Bank of Canada meetings if you have a variable mortgage,” he says.