What Should Parents Consider When Contemplating Buying their Child a Home?

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We all want the best for our children. For years of their lives we nurture and provide for them – giving them both the emotional security to mature gracefully, and the physical security of a roof over their heads. It’s only natural to want to send your children off into the world with secure footing and a head start with a first home to call their own.

In some real estate markets, such as the UK, housing costs are so high, that it is practically expected for children to either inherit or be bought a home to ease them into adult life. In the Canadian market, house prices have rose on average 5.5 % annually over the span of the last 17 years In our increasingly unaffordable real estate market, parents are starting to rationalize home-buying for their child as a parental obligation.

However, is this at the cost of your own financial security? This is the question Rob Carrick of The Globe and Mail poses, and suggests potential downsides to consider.

The reality is most parents have a duty to help with their childrens’ encounters with the first big financial commitments – helping with car insurance, taking on tuition debts, and co-signers to mortgages and rents. Before you throw caution to the wind, consider:

1) The issue of affordability isn’t necessarily the house
While you may be able to comfortably gift the down payment on your child’s first house, you may unintentionally be setting them up for disaster. This is because it’s not just the real estate market that is the problem. The average income is also failing to keep pace with the rising real estate market. Your child may not make enough to continue making mortgage payments – in addition to housing upkeep, trying to begin or raise a family, and saving obligations. So while you may make that bulky down payment on their behalf with an air of contentment from your generosity, it may inflate your child’s budget beyond what they can afford.

2) You might need that money

Just like real estate markets, life expectancies are rising too! This necessitates more retirement saving funds, and financial considerations to the possibility of long-term health or care issues.
And lastly,

3) Your financial reasoning as to the benefits may be flawed

Remember, if you are co-signing a mortgage for your child – there is a reason the bank decided not to qualify your child. If in any way the mortgage cannot be met, the onus is on you.
With that addressed, the second issue with co-signing a mortgage is that it may complicate the process of your child being able to claim their land transfer tax refunds for first-time homebuyers. The best option to avoid this is to give the gift of a down payment in the form of cash.

Lastly, if you decide to purchase your child a home entirely, and have it remain under your ownership while they occupy it, The Economic Times quotes Subramanyam (a financial trainer at IRIS) as reminder that a house is an “illiquid asset”. This means that there is no guarantee that the price will not depreciate over time.

If you are unable to help with your child’s house, don’t worry: this may actually help the real estate market and let incomes progress towards housing prices. But if you do decide to strive for the badge of parental excellence, allow me to help unburden your child and ease the burden on yourself with that extra financial commitment. And remember – if you can only afford to buy one house for your child, they had better be an only child!