Helping in buying a home for your parents is a wonderfully generous option! If your in a financial position that allows as such that you can assist them in this fashion, they are lucky, indeed, and we at the Wilson Team of mortgage specialists are here to help you do so in the most cost-effective structure.
Why buy a home for your parents?
You may choose to help buy a new home for your parents for a variety of reasons:
- Their existing home isn’t accessible, making aging in place a challenge;
- You’ve been financially successful and wish to “share the wealth” with your parents;
- You’d like them to relocate closer to your home, but the difference in housing costs is prohibitive; or
- They need somewhere to retire, but can’t afford a home on a fixed income.
- They don’t qualify with the new mortgage rules and stress tests
- Situations that may have left your parents retirement insufficient
- Allows them to use the current equity in their home to offset the cost of living
Whatever the reason, the Wilson Team is happy to help you make this plan a reality and assist you in choosing the financing option that makes the most sense for your personal circumstances.
Options for buying a home for your parents
There are various ways to assist your parents financially in owning a new home:
- Buying the property outright;
- Co-signing the mortgage;
- Assisting your parents with a down-payment; or
- Buying a home and renting it to your parents.
If you simply plan to purchase the property, you’ll undoubtedly need a mortgage. Since you are buying a second property for someone else, rather than to produce income, it’s just like applying for a mortgage for your own home. If you have a solid credit rating, a good debt-to-income ratio and steady employment, it shouldn’t be a problem. It is even likely that you can make the purchase with a down-payment of only five per cent; and you will receive best mortgage rates as its considered owner occupied. It is called a second home.
There’s also the question of where to obtain the money for the down-payment. As a homeowner yourself, you have a number of options:
- Refinancing your mortgage with a cash-out
- A home equity loan
- A home equity line of credit
- Your parents give you a gift
If you choose to use cash-out refinancing, you obtain a new mortgage on your home for a larger sum than the existing one, and you get the difference in cash. You can then use the cash to make the down-payment on your parents’ home. Remember, however, that your own mortgage payments will now be greater than they were under your previous mortgage.
Home equity is the difference between the value of your home and the unpaid value of your current mortgage. If your home is valued at $300,000, for example, and you still owe $150,000 on your mortgage, your home equity is $150,000. You can borrow against your equity with a loan or a line of credit. You cannot borrow more than 80% of the value of your home when taking out the equity. You must be approved for either of these options and you will encounter associated fees, such as an appraisal fee to determine the current value of your home.
A home equity loan is also called a second mortgage. Using your home as collateral, you borrow against the amount of home equity you have. You will receive a lump sum of cash by using a home equity loan and you’ll pay it back through fixed monthly payments, just as you do with your original mortgage. You must have at least 20 per cent equity in your own property to obtain a home equity loan.
By contrast, a home equity line of credit is more like a credit card than a loan. The bank agrees to allow you to borrow up to a set amount of the equity you have in your home, but you can draw on it as needed and pay it back over time. Your interest rate will be lower than it would be with a credit card, but you must still make a minimum monthly payment. Once you pay down the amount you’ve borrowed, you can draw on the line of credit again. It is flexible, and you aren’t required to draw on more money than you need, so you save on interest.
Co-signing a mortgage
Co-signing a mortgage sounds easy, doesn’t it? A signature on some documents and you’re done, right? Not so fast. Remember, you’ll be liable if your parents can’t make the monthly mortgage payments, since your name is also on the loan.
In financially challenging times, lenders tighten the requirements for obtaining a mortgage and will scrutinize the credit scores of all applicants carefully. If you OR your parents have gone through some difficult times or a recent bankruptcy, your credit scores will reflect these problems and make it more challenging to obtain a mortgage.
On the upside, however, lenders generally look at the combined income of all the borrowers when deciding on the size of a mortgage to approve, so your parents may be eligible for a larger mortgage when you pool your resources.
In addition, if your name is on the title of the property and you are designated as a joint tenant with the right of survivorship, the property will automatically transfer to you upon the death of your parents. This avoids waiting for the probate process and may be practical as your parents age.
Assisting with a Down-payment
If you have the funds, it may be easiest to simply make the down-payment on a home for your parents. If they are seniors living on a pension, they may be able to handle monthly mortgage payments, even though they don’t have a large chunk of money to put toward a down-payment.
If this is something you’re considering, plan ahead. Lenders tend to look askance at large sums of cash that miraculously appear in a bank account prior to applying for a mortgage, since they fear it may be a loan that requires repayment.
In addition, consider the impact on your own financial future and obligations before you choose this route. Will you need the funds for your own retirement or to put your children through university?
Buying and renting
Buying a home and renting it to your parents may be a good option for you, because there are tax deductions for landlords, such as property taxes and maintenance done by professionals. However, you’ll want to make sure that any deductions offset the higher interest rates generally applied to mortgages for rental properties.
In addition, be sure that you are charging your parents market rates for the rent. If not, the Canada Revenue Agency may view the home as a property for personal use. The Wilson Team can explain the tax implications to you.
Whichever route you choose to take, your support for your parents is commendable. It’s a lovely gift to them if you can afford to offer this assistance! We at the Wilson Team will be delighted to make your plans a reality.