Parent and Child As Investment Partners?
It could be the best of both worlds!
With the market progressing the way it is, the ability for first time home buyers to get into the market is quickly evaporating.
In the past year alone, any down payment that they may have saved up will be woefully insufficient or will force them to dramatically reduce their purchasing budget. Those already in the market are having difficulty making the leap even with the increase in value of their current home.
An article by Inman News focused on the idea of giving your children their inheritance early (assuming of course it was there to give) and giving them the benefit of home ownership.
Perhaps this is no longer a sentimental life lesson but maybe the only hope for an entire generation to realize home ownership. It also happens to be a great potential investment strategy for both generations.
Here are a few options to consider:
Loan Your Kids the Down Payment
- Loan your children part or all of the down payment (and have
them cover closing costs and the land transfer costs with what
they have saved).
- Establish an interest-free or interest based loan with specific
terms for repayment of amount and time.
- Establish consequences for non-payment in the agreement
(such as penalties at time of sale).
Loan The Down Payment with Balloon Interest Payments
- Loan your children the down payment but rather than have
them pay you monthly – in the case where they can only afford
to cover the mortgage, property taxes, and their personal
expenses – have them pay the accumulated interest upon
the sale of the home, or after a period of time when they will be
in a better position to pay.
What Else Can You Do to Buy Your First Home?
No matter path which you choose – going it alone or any one of the above scenarios, make sure you take the following steps to prepare yourself or your kids for their first home purchase:
Manage Your Expectations
Several articles by major news outlets state on a regular basis that a person or couple with a total household income of $120,000 cannot afford to buy a detached home in Toronto; this is not surprising. Toronto Life recently profiled homeowners in their 30s, and the common element was how they were not buying in the core – many were purchasing semi-detached homes, multi-unit homes, or condos as their first step on the property ladder.
Know Where You Want to Live
Well before it’s time to buy, it’s time to educate yourself about the market and the neighbourhoods you’re thinking about. If you don’t already live there, spend time in the area, check out your commute, visit friends and local community events and ask about the schools. As your first home purchase, you want to focus on up and coming areas so you can maximize the appreciation for your next move.
Shore up Your Credit
Know what your credit score is and work to improve it. Check your report for any errors, pay your bills, maintain a low balance,minimize multiple sources of credit and avoid unnecessary credit checks. Many credit scores get hit because of simple errors so report and correct anything that isn’t right.
Meet with a Mortgage Advisor
Find out what you are currently able to qualify for on your own so you know how much help you need. Housing costs shouldn’t exceed 32% of your gross income and include your mortgage payment, taxes, heating expenses and half of any condo or maintenance fees. Your total debt (for housing, cars and credit cards) shouldn’t be more than 40% of your gross income.
And just because you can borrow a certain amount, doesn’t mean you should necessarily go for it unless you have some backup – any chance in interest rates or surprises in your personal expenses won’t give you any breathing room.
Talk to Angie Alvarez from Capital Home Lending today to get
started: firstname.lastname@example.org or 416.315.6261