Pattie Lovett-Reid: ‘Bank of Mom and Dad’ is still open for business, but should it be?

HUNTSVILLE, ONT. —
Home ownership is a dream for many but high housing prices in many parts of Canada are pushing it further out of reach.

A new report by Manulife Bank found that three out of four people who want to purchase a home simply can’t afford one, with one-third of homeowners admitting they needed help from their parents for the purchase.

I worry a lot about the Bank of Mom and Dad coming to rescue.

I don’t worry about their desire to help, I find that it’s admirable. However, I worry about their financial ability to do so. Nearly one in seven parents helped their children purchase a home during the pandemic over the past year, with almost 5 per cent tapping into the equity in their own home to do so.

Parents helping out their children to purchase a home is a relatively new phenomenon. Twenty-five years ago it was unheard of outside the circle of the ultra-rich. Today it is commonplace to make this a family affair with more and more parents only too happy to help if they can.

However, before you help your kids, beware of the risks.

1. Do you have enough money set aside for your retirement? This isn’t about being selfish. It is about being financially self sustaining. There is no point helping your children financially only to become a burden on them down the road.

2. Be realistic about what you promise. If fairness is a value your family lives by, it is reasonable for other children to expect the same financial help. Can you afford that?

3. More than 60 per cent of those in the Manulife Bank survey worried about the cost of living going higher. Challenge your children on whether this gift is a one-off or will ongoing financial support be required? Do they have a good credit risk, credit history and will their salaries keep up with inflation? Do your children really know their financial numbers and do you?

I would argue probably not.

“Survey findings show 72 per cent of Canadians admit they do not have a written financial plan and just one-third (35 per cent) of those who are in debt have established a strategy to repay their debts,” said Rick Lunny, President and CEO Manulife Bank. “Identifying where your money goes, finding ways to save more, and minimizing your current spending can help you feel more in control of your money matters to achieve larger goals like home ownership.”

4. There is a difference when you gift as opposed to co-sign on a mortgage. A gift is simply a gift with no recourse, while co-signing on a mortgage could still leave you vulnerable should your children not be able to keep up with the payments or  divorce and the home becomes part of the equalization payment.

5. You may decide to simply lend your children the money for a down payment with little or no interest payment required. However, the terms of this agreement should be crafted and agreed to before the money is funded. The repayment can be eliminated upon the parent’s death or deducted from the estate during the distribution of assets.

Parents worry about their children being able to afford a home and I get it. However, helping them take on more than they can handle financially isn’t a gift. What is a gift? Helping your children find ways to save, become more financially savvy and feel in control of their own financial destiny.

This doesn’t mean you shouldn’t help where you can, however. If you can’t afford it you shouldn’t feel badly or obligated to do so.

I believe it is time to drop any sort of stigma around renting because for some it just makes financial sense and that is OK.