Preparing Your Children for Their First Mortgage

Many of you have children who most likely will be purchasing their first property in the next few years. Since I had the opportunity to work with many young buyers over the past few years, I thought it would be helpful to  share some industry wisdom and tips with you.

First of all, you may be asking yourselves, “What is the legal age to purchase or own a property in Ontario?” Well, I wasn’t 100% sure myself, so I “googled” the question and the answer that came up was “18 years old”. “That’s what I thought”, I told myself, but it was better to check it out with the rest of the world :)…

What can you as parents or guardians do to help your loved ones own a property of their own? Besides reading this article and gifting them a down payment, not much, really. Let’s start with the article.

One of the most important things that the bank will want to see in a young mortgage applicant is some kind of a credit history. Therefore, it is important that future buyers start building their credit history by obtaining a credit card through one of the major banking institutions. Typically, the bank where they have their chequing or savings account will be able to help them obtain one. Alternatively, they will often have the opportunity to apply for one through their college or university, since several banks offer credit cards with small limits for students. If not, they can always get one with one of the parents to co-sign for them.

by Tino Brelak

Whichever avenue they take to get a credit card, it is important that they are the primary cardholder on the account, as this is the only way they will be building the credit history for themselves.

Once the card is obtained, have your child use it frequently, and most importantly pay the minimum payment on time. There is no difference whether they pay the card in full, or only the minimum payment, as long as they pay it on time. Have them keep their balances below 50% of the limit, and their credit history will be on its way up.

Next, the down payment…

At a present time, the minimum down payment on a purchase for first time homebuyers  is 5%. However, one will also have to prove that they have additional 1.5% of the purchase price for closing costs (lawyer fees & land transfer tax). In other words, your child should be looking at 6.5% of the purchase price for down payment and closing costs. If they purchase a condo for $350,000, they should have $22,750 saved.

Here’s a tip. If your kids are planning to contribute towards the Registered Retirement Savings Plan (RRSP) in latter years of their life, a good way to start saving for a down payment is by opening an RRSP account, and contributing into it. As a first time homebuyer, one is allowed to withdraw up to $25,000 from their RRSP’s towards the down payment on their first home purchase. The money has to sit in an RRSP account for at least 90 days before it can be used for a down payment. (This way they are also less tempted to use their saving before deciding to move out.)

Let’s assume they have $10,000 in their savings account, saving it for their down payment. If they use those funds and contribute them towards their RRSP, they will be able to withdraw that money for their  down payment as early as 90 days later. The benefit is that they will also get a tax rebate from government. If they are in a 30% tax bracket, they should get some $3,000, which can also be used towards down payment, or any other purpose. They will have 15 years after the purchase to put those $10,000 back into their RRSP.

One of the most important things that I would like to address lies with the realistic circumstances under which your children may be buying their first properties. Practically speaking, they may have just turned 18, 19 or 20… they just graduated from college or university… are looking for, or are in process of getting their first job, which is probably not paying enough to carry the mortgage on their own. They may need your help. Perhaps not with the down payment, but as a co-signer of some sort…

In most cases, if the young adult does not have (sufficient) income, or has not been in the job force long enough to qualify on their own, the bank will require that one or both parents are registered on both the title of the property and the mortgage.

This could become very costly, both in the short and long term.

For one, most of the banks require that the property is registered as “joint tenants”, meaning that all parties are equal owners of the property. If there is one parent and one child, this would mean that child will be owner of the 50% of the property and parent of the other 50% of the property. The child will receive first time homebuyer benefits (lower land transfer tax) only on his/her 50% of the property, while the parent will lose that benefit, if already owning a place of his/her own. In the long term, once the property is sold, the child will not pay taxes on the capital gain only for his/her 50% share (because it is a principal residence), however the parent will pay it on his/her half of the gain.

A much better alternative is to register the property as “tenants in common”. Although not all banks will allow for that kind of registration, some banks do. Or rather, they simply don’t care how it is registered.

If you register the property as “tenants in common”, you will have the right to split the ownership any way you like. For example, a daughter or a son will have the right to register the property 99% in favour of her,/him and 1% in favour of parents.

This way, the first time homebuyer’s discount on land transfer tax will be maximized, and capital gain tax minimized.

As a mortgage broker with access to several different lending institutions, I can help you and your child to navigate the different options and ensure that you receive the best possible solution for you in the long run.

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