Buying a Home for Your Child

It used to be big deal if Dad bought you a car when you were old enough to drive – but now some parents are buying homes for their kids. It's a great investment and saves them from paying rent, whether they are attending college or university or are striking out into the working world.

A recent poll by TD Canada Trust says that 10 per cent of Canadians would consider buying a condo for their adult children. For the parents it offers some peace of mind, since the investment may help their children into better housing than they could afford if paying rent. For the kids, it's a way to learn about the pros and cons of looking after their own homes, and perhaps even get some experience at becoming a landlord.

The trend is growing in cities across the country. In Montreal, developers have offered incentives specifically geared to families who are buying a condo for a young adult. In Toronto and Vancouver, where Asian investors are buying up many of the new condos, it's not uncommon for a family to buy a unit for their child to live in while attending school. Sometimes they have long-range plans to move to Canada themselves, so they buy now and have their child live in the unit, or rent it out.

For students heading to a new city to attend college or university, buying a house or condo eliminates the need to search for sometimes pricey student accommodation. Some of these students live in the homes and rent out a basement apartment or have roommates to help offset costs.

As with any real estate investment, there are a number of financial, tax planning and social aspects to consider before buying a home for your child. The usual rules of real estate apply: location, location, location. Buyers must ensure that the property will be in demand for renters, because the child may not want to live there for long. If the unit is sold in a couple of years, will the buyer be able to recoup his investment?

Buyers must ensure that a property being purchased with a rental suite complies with local zoning bylaws, fire codes and electrical safety standards, and that the proper insurance is in place. Some municipalities have tried to clamp down on student housing in new developments because of complaints from the neighbours.

If the adult child is going to rent out part of the house or have roommates, even if they are moving in with friends, it's important that the living arrangements are spelled out in advance in a businesslike manner. Each renter should sign a written tenancy agreement that covers how much rent will be paid, what additional costs (such as utilities) will be paid by the renter, what facilities will be shared, and house rules such as whether pets are allowed, smoking policies and provisions for parking and laundry facilities if applicable

In some provinces, if the kitchen and bathrooms are being shared, the provincial tenancies act may not apply. That gives the landlord the ability to evict a renter without going through a formal eviction process if they find out they can't get along with the roommate.

Kathy Monro and Caryn Watt of Pricewatershouse Coopers recently wrote a paper (Wealth and Tax Matters, Winter 2011) about the tax implications of buying a home for your adult child, setting out four options.

The first is purchasing a condo in your own name. The downside to this is that when the condo is sold, it will be subject to capital gains tax because it isn't your principal residence. Under Canada's tax law, you and your spouse (including common-law partners) and any unmarried children under the age of 18 are entitled to designate just one property as your principal residence for each year.

The advantage is that it may protect your investment if your adult child is married or gets married and then gets a divorce. In provinces like Ontario, the matrimonial home is included in calculating "equalization payments" even if the home was a gift or inheritance and even if it was owned by one of the spouses before the marriage. So, the other spouse is entitled to an equal share of the value of the condo. If the condo is in your name, it would not be subject to this rule.

Munro and Watt say the second option is giving a cash gift to your child to cover the cost of the condo. The child holds the condo in their own name, and as a principal residence it does not incur capital gains taxes when sold. It does not protect the condo from equalization in the event of a divorce.

Option three is lending the money to the child by way of a mortgage. The mortgage should be interest-free to avoid taxable income. "Because the child owns the condo subject to a mortgage, we understand that this plan could provide better protection to you and your child under family law legislation should the child divorce while owning the condo," say Munro and Watt.

The fourth option is setting up a family trust, which would then own the condo. "Family trusts are popular vehicles for sharing wealth with family members because they offer the trustees the flexibility to accommodate the changing and competing needs of the beneficiaries," say the authors.

****** ATTENTION FIRST TIME BUYERS ***

New mortgage programs for creditworthy clients with limited down payment

RBC is launching two default insured mortgage programs that have been modified slightly to meet RBC requirements:

o CMHC Non-Traditional Source of Equity
o Genworth Cashback Equity.

These two programs allow new home buyers who have above average credit scores and good cash flow but not enough funds for a down payment to use borrowed funds or Cashback to purchase a home.

Cash or borrowed funds can be used for down payment
Through these two programs and subject to mortgage default insurer approval, clients with good credit can use available Cashback or borrowed funds toward the 5% minimum down payment for a home purchase. Clients must also qualify under RBC standard credit criteria for both the mortgage and any loan included in debt servicing calculations.

Other key details of these programs:

o Available only for home purchases
o Property must be a owner occupied primary residence and all applicants must reside at the property
o Cashback and funds borrowed for down payment cannot exceed 5% of purchase price
o Loan can be a unsecured RBC Royal Credit Line or Term Loan, and can also be obtained from a competitor
o Available to clients for one mortgage only

Only Available at RBC.

New Mortgage Guidelines

Finance Minister Jim Flaherty is unveiling new mortgage lending rules this morning including reducing amortization periods to 30 years

These measures were announced at about 8 a.m., just before the North American markets opened.

The new rules include:

• Reducing mortgage amortization periods from 35 years to 30 years.

• Cutting the amount of mortgage refinancing to 85 per cent from 90 per cent of home value.

• The government will withdraw insurance backing on lines of credit on secure homes, such as home equity lines of credit.

A government official said the rules are designed to push for “responsible lending and borrowing and encouraging people to increase their home equity.”

The new measures aim to reduce interest payments to help Canadians’ pay off their mortgages before retiring.

The proposed regulation comes at the heels of an announcement by the Bank of Canada that the national household debt is at a record high. They also stated that “the ratio of household debt to disposable income has reached 147 per cent.”