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The bank of mom and dad: Taking extremes to secure children’s homeownership dreams in steep markets

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If you’ve wondered how the Bank of Mom and Dad is faring in these dodgy economic times, rest assured it’s more popular than ever.

Recognizing that it’s harder to buy a home now than when they were young, in recent years Canadian parents have passed billions of dollars to their adult children to give them a leg up entering or advancing in a housing market where they’re up against impossible prices, limited supply, stringent mortgage requirements and steep interest rates and taxes.

It’s being hyped as an unprecedented transfer of wealth, taking FOMO — fear of missing out —  to new levels, with boomer parents doing all they can to ensure their kids grab the receding brass ring of homeownership before it’s completely out of reach. 

 

Embracing extreme measures before homeownership completely out of reach

 

This has gone way beyond providing a loan or helping with the down payment, especially in the past five years. Parents are embracing more extreme measures, pitching in with mortgage installment payments or becoming loan guarantors, liable for mortgage payments if the child defaults. Many are even going on title as co-signers to help their offspring qualify for a mortgage. 

In some cases parents are flying without a net, pulling funds out of their retirement savings or equity from their own home, using a second mortgage or home equity line of credit to assist, potentially putting their retirement at risk.   

 

Suggest clients get legal advice if asked about parents loaning or gifting money to kids

 

It’s a wonderful thing to be able to help get your struggling offspring launched — especially if they’ve been getting a little too comfortable in your basement. But realtors need to be aware of the potential risks when representing clients in these situations, “or they could find themselves in hot water,” warns Toronto business and real estate litigation lawyer Matthew Mulholland.

If things go sideways, realtors may be exposing themselves to an expensive and time-consuming lawsuit. “In all cases, real estate agents should encourage their clients to obtain legal advice when consulted about parents loaning or even gifting money to their children,” Mulholland advises.

He provides this sobering example: “Imagine a situation with a pre-construction home and rising interest rates. There’s a risk that a child may not be able to secure a mortgage by the time the sale closes. They may face exposure for damages from the developer … but exposure may be limited by their limited assets. A parent, on the other hand, may have another property or other assets, and face significant exposure because they’re named as a buyer on the agreement of purchase and sale.”

 

Tough saving for down payment with rent and mortgage payments so close

 

Greater Vancouver Re/Max agent Tim Hill says he’s seeing parental bounty in well-off families extending to helping with second home purchases: “It’s not just limited to the first.”        

Hill has witnessed parents providing these funds as an early inheritance or finding other creative ways to get their kids into a more stable situation or keep them nearby. “Everything is so expensive here,” he says. “If rent costs nearly as much as a mortgage, it’s hard to save enough for a down payment to make the jump to owning.” 

He recalls clients — a young couple —  whose parents helped with a down payment and also went on title, which enabled the pair to move from a condominium into a fully detached house, potentially their forever home. “That financial nudge put them ahead of the game, allowing them to get something long-term now and avoid having to potentially make the jump to a townhouse first.” 

 

What about families with fewer resources?

 

Those who come from families without deep pockets have fewer options. “In the past year I’ve seen more young families make the move to Alberta than ever before,” Hill says.

Unfortunately, parental generosity is increasingly necessary if younger generations are to get ahead, especially in large urban centres. Without that foot in the door, the dream of home ownership is “slipping away from too many young families,” observes Tim Hudak, CEO of the Ontario Real Estate Association (OREA). 

The phenomenon exists across the country, but Ontario and British Columbia “are in greatest jeopardy of losing younger generations to other provinces” due to lack of housing affordability, Hudak asserts.

 

Student loan debt: Among the biggest barriers for young adults wanting to buy a home

 

The government urgently needs to prioritize housing supply and affordability issues and first-time buyer initiatives, in his opinion. 

“The divide between the haves and have-nots is growing wider. If you can’t borrow from mom and dad, it makes getting into the market much more difficult,” and access to housing and financial security more precarious, with disadvantaged groups particularly at risk, states Hudak.  

According to a 2023 OREA poll around the impact of student loan debt on homeownership, this type of debt is among the biggest barriers for young adults wanting to purchase a home. “Young people have far more debt today,” confirms Hudak. One offshoot of this is that it’s taking them longer to hit life’s milestones — homeownership, marriage, starting a family, etc., the poll found.

Because of high housing and living costs, their parents are postponing milestones too. Nearly half of those surveyed by OREA said they’ll stay in their family home for the foreseeable future rather than downsizing.

 

75% of post-secondary graduates “still believe in the (homeownership) dream” despite worsening affordability

 

A different survey conducted by OREA in 2022 found that at that time, 4 in 10 parents in Ontario had helped their adult children (aged 18-38) financially with a home purchase. The average loan provided was about $41,000, while those parents who gifted money averaged close to $74,000. (Many parents gave a combination loan/gift.) 

Some bank studies put that amount significantly higher, especially in large cities like Toronto. Today, as prices have climbed, it’s believed that gift amounts have likely risen as well, experts note. And it’s been observed that it’s not uncommon for “children” as old as 40 and over to be the recipients of parental largesse around housing. 

“Now, two years later, it’s our expectation that the affordability crisis has deepened,” says Hudak. In spite of this, 75 per cent of post-secondary graduates “still believe in the dream and want to own a home.”

 


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