Episode 56 – Helping Adult Children Buy Their First Home with Steve Ryan
With the markets going up every year, children are turning to their parents for help with buying their first home. Are you considering helping out your children, but wonder what that will look like?
There are a few ways to do it. You can…
- Assist with the down-payment
- Sell your current home to your children if you plan on downsizing (let me explain…)
Listen to episode 56 of The Heart of Your Money podcast where Steve Ryan and I chat about how parents are helping their children in today’s housing market!
Zena Amundsen (ZA): Hey there, welcome back! Today, I have a guest with me. Steve Ryan is an Independent Mortgage Broker here in Regina, Saskatchewan. He’s joined me to help talk about Parents helping their adult children buy a house.
You’ve been a mortgage broker since 2012, and you know way more than I ever could about this, hence why I’ve asked you to join. Thanks for coming today.
Steve Ryan (SR): Thanks for having me on!
Zena Amundsen (ZA): Your office is directly below mine, and so I apologize if there’s heels tapping on the floor.
Steve Ryan (SR): Is that you dancing all the time?
Zena Amundsen (ZA): Yeah, that’s me. And then also, I don’t know about you, but I get the cake smell in the afternoon.
Steve Ryan (SR): I know it’s not good for the waistline.
Zena Amundsen (ZA): The chocolate smells amazing! Okay! So you’re in our building and so if at any time, listeners, I’m going to let you know how to reach Steve, but if you have any questions I can forward them on and I’ll just tap dance on my ceiling. And you’ll know!
Steve Ryan (SR): You Bet!
Zena Amundsen (ZA): I want to chat today about some of the options. This came up in a conversation with someone, and I hadn’t realized how common it is. And it’s about helping our kids get into real estate and buying their first house. And I’m going to share, I am a young married, young mom, like 22 bought our first house. Our first house was, I think, $39,000.
Steve Ryan (SR): Yeah.
Zena Amundsen (ZA): And I looked back, and we were struggling to make the $275.
Steve Ryan (SR): And you probably had a 15% interest rate or something though.
No, I do remember 4, 4 and a half. Yeah. I thought that was pretty good. And we had to scavenge to get the down payment. So I think each of our parents lent us, and I know Ian’s parents lent us maybe two grand. And so the down payment was still struggled but it was a lower amount. So things have changed, and it’s been interesting and talking to you because I have two daughters that are in their twenties. Knowing that this is going to come up. So I think this is more common for us, with adult children than we think. So share with me. Are you seeing that? Are you seeing new buyers in the market getting help?
Steve Ryan (SR): I would say roughly half of the first-time buyers I see are getting assistance from their parents, like recently. Whether it’s, you know, something that we document that had the last few months or parents had set away savings account for them in the past or parents co-signing and it’s more and more common. As a young person, it’s tough to save 5%, even if it is, you know, $200,000 mortgage or whatever it may be. It’s not a small chunk of money if someone’s just coming out of post-secondary school or whatever it may be. So I’m seeing it a lot and I’m seeing we’re seeing more and more co-signers because it seems that every turn, the government makes it tougher for qualifying rates. They increase the qualifying rate. They make tougher standards. If you’re carrying a line of credit and all these things that seem to add up where student loans, they used to come in, and they hit you. When I started 10 years ago, someone come in $50,000 income as well, that’ll work for what you want. And now it’s like, it’s a lot tougher with using the stress test and all these. All these things. So, I’m seeing a lot more co-signers as well.
Zena Amundsen (ZA): And I think things might be getting a little bit more creative because our original thought as a financial planner was no to co-signing because the credit rating and the parent is attached. But there’s sometimes, there’s no other workaround. And I was actually right before we talked, I was researching it, and there’s this financial planner in Toronto, that I follow her. And she does quite a bit of interviews on this and she actually was saying, that’s what they talk about now. So she’s, and I’m like, okay, so, our financial planning standards mentality has to change a little bit because sometimes the only option is co-signing. And so then there’s these family conversations, planning, you know, are you worried? Like, are you, it might feel safe enough to put my name next to you or are you going to actually pay the bills? What are the risks? Right. But I hadn’t realized because you know, more than 10 years ago and taking my financial planning, you said no, like, definitely not as a parent. Do not co-sign. Now that’s changing.
Steve Ryan (SR): It wasn’t needed as much at that point. Like if, uh, you know, like I said, when I started, you could do 50 or you could do a 30-year mortgage. Now you can do 25. They’d qualify based on whatever the rate they were getting. Now they’re qualifying based on a higher interest rate. So it’s literally been knocked a hundred thousand plus worth of qualifying power for a buyer from now to 10 years ago. And obviously, the market has gone up in that time. So it’s definitely, uh, definitely made it tough for young people.
Zena Amundsen (ZA): So, do you see joint ownership a lot? Do parents buy a house with their kids?
Steve Ryan (SR): Yeah. Like that’s the kind of, uh, something that’s gone by the wayside. So you used to be able to, um, be a guarantor essentially, but not be on the mortgage per se. But now, if you’re on, if you’re, co-signing now with pretty much all instances, you’re an owner of the house. So it’s like you own if you co-sign for a young couple, you only a third of the house. If you qualify or you co-sign for one kid, you own half the house. So it’s like, when it’s up for renewal, we can move you off usually. But it’s like, yeah, there’s full liabilities. And then that’s the other thing, if they go to get financing, obviously on something else that, so there’s a lot to consider for the co-signer too.
Zena Amundsen (ZA): Are there, are you getting a lot of parents buying the house outright? Not as joint, not co-signing, but just buying the house themselves, doing the down payment and then essentially quote-unquote, renting it to the adult child?
Steve Ryan (SR): I haven’t seen much of that. What I have seen a lot of though, is parents kind of, either whether they’re moving to, I don’t know, probably not quite a retirement home, but downsizing or, and then essentially selling it to their kids and gifting the down payment. So, you know, if the house is worth $200,000, for example, they sell it. They’re essentially selling it for $190,000 because then they don’t have to actually transfer any cash, but they get the down payment from the equity. So that would be working on a few of those as we speak. So that’s a pretty common one.
Zena Amundsen (ZA): Okay. That actually got my brain going because hopefully, my kids don’t listen, so I don’t give too much information, but my brain has, being the planner that I am the nature of what I do. I’m always, you know, the wheels are spinning. I was thinking, okay, well, if one of the girls wants to buy the house that I’m in – and it’s small– is okay, but they still have to come up with the down payment. And how does she, you know, I don’t think her savings would quite reach there. How would she take it over? And so you’re saying that you can actually then take the equity of the house.
Steve Ryan (SR): And just the 5%, so, I mean, if you, if you think of it from my realtor, friends, won’t love this, but if you of this from the standpoint of a realtor, were to sell the house for, if it was a, we’ll go back to the $200,000. A $200,000 house and you pay your 4% in the realtor fees, then you’d walk away with one -ninety-two. And in this case, you’d walk away with one-ninety cause you gave them that. So it’s really not a bad option. And that way, the kids don’t have to come up with any on their own yet, they still have that little bit of equity when they move in. Same way they would if they came up with it on their own.
Zena Amundsen (ZA): I like that one, but then I’ve got to wait and see like what, wait ‘til they’re ready. Could be in there for a long time.
Steve Ryan (SR): The other thing I guess that I would talk about is I try if I can get to someone early enough. And this would kind of overlap with what you do is that if somebody, if a parent’s gifting the down payment and they can hold it in their account for 90 days. I advise them we’ll just put it into an RRSP because after 90 days, you can withdraw that RSP tax-free as a first-time home buyer. For the kids, so the kids get the RRSP, the kids get the better tax return, and the kids have to pay it back over 15 years. But they’re able to get that money, so it’s kind of a good tool.
Zena Amundsen (ZA): Okay. Win on the tax plan, eh? That’s awesome. I like that. Okay. So Steve, so you’re saying that the kids, they have RRSP room and then you’re going to gift the cash, they can put it into the RRSP. It has to be in there for 90 days, and then they can take it out as the home buyer’s plan. They also, that year, get the tax deduction. Okay. That’s pretty good.
Steve Ryan (SR): Yeah. It makes sense. It makes sense to do, and then hopefully gets the kids paying it back and gets them on a routine of contributing too.
Zena Amundsen (ZA): It also gives them a responsibility of having to pay back and, you know, making sure at tax time, like you have to put back into your RRSP, so it’s forcing them actually. When I think of present day self and future day self, it’s actually forcing them to take care of their future self. If they can put into their budgeting and cash flow a little extra, meaning that not just the minimum if they can, you know, get into the habit of putting in and still affording the house. Oh, that’s a win. Okay. I like that one. Have you seen any negative things happen? You might not because you set everybody up for doing what they need to do and then they go live their life. But have you heard or seen anything negative with the joint or the, you know, gifting?
Steve Ryan (SR): Yeah, I think usually when I see there becoming an issue is not necessarily with their child, but with their child’s maybe partner that they’re buying with or a partner that comes into the picture after they’ve moved in. So I’ve had clients where, you know, like the son or daughter has got a partner and then they lived there for two years and then they split up. And then, you know, mom or dad saying, well, we gave a down payment, but it’s, it’s clear in all documentation that it is a gift and how that’s, you know, decided at that point was not. But that, I guess, to be aware of that. Yeah.
Zena Amundsen (ZA): So in the planning, so that, that’s a really good point is that when there’s a gifting of the down payment and your child’s owns this house, and then they start a cohabitation, or they get married. That is now part of a hundred percent matrimonial property, and the partner, whether or not they put in anything, it doesn’t matter. And I have had this conversation with clients and parents is that, there is some things you can do. So it’s just about contacting your financial expert, like your financial planner or getting some outside advice because maybe instead of gifting, it is a note like alone on paper, whether or not this is where I’d have to consult. Uh, but you know, whether or not it gets paid or not is up for discussion, but because it’s documented, it means that going into that cohabitation or when a marital property has to be split because it’s on paper and it is actually considered a loan. Then it has to be taken from part of the equity. And so there are, there is some in that’s where, you know, you just for a cheap lawyer write up, that’s totally worth it, but there’s some forethought there. But you’re exactly right. We have to kind of do a little bit of planning. We have to come up with some of the risk around that because unfortunately those things do happen. That’s a good point.
Steve Ryan (SR): Yeah. In young clients in general, I always think, if they’re buying a house or buying a condo, it’s always like, “Oh yeah. We’ll be here for sure. Five years. And I don’t have a partner, and I won’t” and it’s like, well, then they call me two years, that they need a bigger house. And they found someone new and then two years later they’re having a baby, life moves really fast when you’re 25 and buying your first house. So there’s, there is lots to consider.
Zena Amundsen (ZA): Yeah. There’s some great written agreements that can be done up too. So we’ve got some people that do some really good co-hab agreements. Do you see, is it a different scenario? So we’re in Regina, Saskatchewan. I do have some listeners across Canada and in some of the big centers like Vancouver, Calgary, and Victoria. Are we on a different level with, with parents needing to help out?
Steve Ryan (SR): Um, well, I mean, I’m sure. I do work with people all over Canada. In the bigger markets, obviously, you start talking about bigger numbers needed, especially when you’re talking Vancouver and Victoria. Because if you hit a million bucks, it has to, it’s a about 20% down. So that’s when you know, we don’t, you don’t see first-time buyers buying million-dollar homes here, but I’m sure in some of those markets, you may, where that’s going to present a, a lot, a lot bigger number. I mean, here, you see, typically see if a 10 to 15,000, which of course, isn’t nothing, but it’s, um, not 80 or 90 or something that you could see.
Zena Amundsen (ZA): That’s where that planning piece comes in, you know, like the years in advance. And so I almost, you know, I think that it’s conversations that before your kids even reach the point of needing to move out, it’s I don’t know what the right age is. If it’s the preteens or teens, it’s having that discussion with either, you know, yourself or your partner. What are your values? Like, are you thinking that you’re going to want to help kids out? And if so, we’ve got to start planning for that right now. Yeah. Those are, that’s a big chunk of change.
Steve Ryan (SR): Yeah. And it’s yeah, it used to be your education plan, but now it’s a totally another component to that.
Zena Amundsen (ZA): Yeah. Education and house planning. Um, okay. Well, is there anything else that you wanted to add that maybe we missed? Some scenarios that happened with getting first-time buyers in there and parents.
Steve Ryan (SR): Yeah I think we kind of touched on it before, but I think the big thing is having a plan more than, I mean, most times I see someone come in and they say, “Hey, we found the house we love, and we want to get an offer going down, my dad and mom will help me.” And then there’s not that, I mean, it’s fine, but that’s not the plan where, you know, if you go through the RRSPs, and maybe to get your five or $6,000 tax return instead, like all of, all of those things. So the sooner you can get in, just the better, you know. Planning with you and with the mortgage side of it. The sooner you get in, the better. So that you can figure out after you move in, and having a $6,000 tax return is a nice thing to catch you up on any expenses or miscellaneous things. So the sooner, the better it’s just the most, would be my biggest advice.
Zena Amundsen (ZA): So do you do – this is how long it’s been for me – Is there still pre-approval process?
Steve Ryan (SR): Yeah. Yeah, so we pre-approve people, and that’s another thing with first-time buyers is they don’t teach you about your credit in school. They teach you how to find that angle of 12 triangles on top of each other, but they don’t teach you how to manage your credit score. So, lots of people will come in, and they’ve found a place, and it’s like, well, we need three months because you didn’t know that you had this on there or, you know, Roger’s cell phone collection. All these things that come up, that people don’t even don’t even register. And then when they get in, and I could say, okay, well, we could take care of this, we should be able to be pre-approved in a month so that when the time comes, you’re able to move forward. But yeah, for the pre-approval process, we see, you get some surprises when people haven’t really had a need to check their credit before.
Zena Amundsen (ZA): Yeah. And that’s a key as a parent, like as a parent with my daughters I would, I think I’d want to be a part of that process. Not meaning it, you know, I don’t need to actually stick my nose in. I’ll stay in my own lane. I don’t need to know their exact credit score. I would want to know, like, okay, you are capable of paying your bills. You can do this.
Steve Ryan (SR): Right. I will always tell my young clients, like if your parents want to talk to me, here’s my number. Because I know parents want to know that, you know, a lot of times they’ll have had a long relationship with their bank or their person. And I’ll say, well, I’m happy to talk to them and go over all of the scenarios of what your payments will look like if that’s okay with you, and we can go over everything. So that mom and dad are comfortable with what’s going on. Cause it can be, you know, it’s, you’re worried about your kids.
Zena Amundsen (ZA): Awesome. Well, thanks. I think we’ve covered most of it. So if someone wants to reach you, how do they get ahold of you?
Steve Ryan (SR): Yeah. My number is 3 0 6 -5 0 1 -9 0 8 5, and you can just text or call anytime. As well, my website is steveryanmortgage.com.
Zena Amundsen (ZA): Awesome. And if you guys need to reach out to me, I can pass on all that information and do a dance on my floor. You will hear. Thanks so much for joining!
Steve Ryan (SR): Thanks for having me!