My general rule of thumb for parenting is to let children, be they five or 35, do as much as possible for themselves. It makes them feel strong and competent and that goes a long way to making them feel happy.
While many parents are quick to help their adult children buy a house, my husband and I have not helped finance our children’s mortgages. I am happy with our arrangement as it leaves us with much less complicated relationships.
Our children don’t feel financially beholden to us and because we have no propriety interest in their property, we’re more likely to refrain from giving unwanted advice. In addition, our children have no sense of entitlement to our other assets. I have seen this happen when parents help with mortgages and understandably, the parents are resentful.
However, our daughters and their husbands have been able to afford mortgages without our help. Our youngest child has yet to show an interest in buying a house and with his current income it would be impossible. So we may yet be providing help with a mortgage.
If we do help, there are pitfalls to be avoided.
Scott Hannah, President and Chief Executive Officer for Credit Counselling Society, warns parents that children ultimately need to be responsible for their own financial well-being.
“You really want them to have some skin in the game”, he says. “The worst case I’ve seen was a woman who came to me and said she helped her son and his wife with a $150,000 down payment for a $600,000 home. They ran up a line of credit which they couldn’t manage and the parents bailed them out. I told her ‘If you don’t help your son get financially independent, he’ll be coming to you in his 40’s’. The line went silent and she said ‘he’s 43’.”
Eli Boucher, Branch Manager of a TD branch in Ottawa, says the easiest and most direct way to help is to give a cash gift. This is particularly useful if it brings the child’s down payment up to at least 20 percent of the value of the house, which is needed to bypass the costs of Canada Mortgage and Housing loan insurance.
To avoid your gift being split between your child and his or her spouse in the case of a marriage breakup, financial advisors often suggest that couples sign an agreement stating that the entire amount would be the sole property of your child and not a marital asset to be divided between them.
Paul Stead, manager of a Scotiabank branch also in Ottawa, suggests that if the parents are helping with a large amount, they take out a second mortgage on the home. The parents will still have a claim on that amount if a marriage breakup occurs and the property cannot be re-financed without the involvement of the parents.
Another way of helping is to co-sign the mortgage. Mr. Boucher says this typically happens when the child has a poor credit rating or does not have the capacity to repay the mortgage. However, the parents could find themselves paying for the entire mortgage if the child does not honor his or her commitment.
As for us, if we do help our son, we will need to ensure we play a fair game and give our daughters a similar gift. Mr. Stead reported that he has seen cases where children expect that if parents help one child financially then the siblings expect the same. At times, it can create animosity amongst the children, he said.
And for those parents who cannot afford to help their children, he had the most reassuring words: “Money can’t replace love.”
Have you helped a child finance a mortgage and if so, why and if not, why not? I would love to hear from you. Please leave your response in the Reply Box below.
This article was first published in The Glebe Report.