With a career spanning almost 4 decades I have worked with clients as young as 18 and as old as 98. One thing I have experienced, is when a homeowner is in the 65+ range, they start to look at where they will direct their assets. These can be their personal residence, rental properties or investments in the stock market as they age. A tool I have had many of my clients’ use, is to gift their personal residence to their children when they are still living in the home with the understanding that they can stay as long as they can manage. This is a good estate planning strategy as it allows the homeowner to “age out” in the property they feel most comfortable.

However, with the cost of Real Estate higher than it has ever been I am starting to see some creative ideas being implemented to help children into their first home. Here is one strategy being used.

Sam and Jane have lived in their home for decades and have long ago paid the mortgage off. They have one daughter, Gloria. They would love to see Gloria purchase a home however they have seen that it will take years for her to save what would be needed for a downpayment. The strategy was to place a mortgage on their residence and allow Gloria to use this equity to purchase a property for herself. Here is what it would look like:

Value of Sam and Janes home – $900,000.

The mortgage they are taking out on their home – $180,000. (With a monthly payment of $1,021.)

Purchase price of a semi-detached home for Gloria – $633,000.

20% down payment on the semi-detached home – $126,000. (With a monthly payment of $3,200 mortgage and taxes.)

In this scenario Sam and Jane end up with $180,000 as a lump sum to give to their daughter, however as much as they want to help her, they do not want to incur a $1,000/mth payment. In this case they agree to offer Gloria $133,000 for her to use as a downpayment on a home. This leaves Sam and Jane with $47,000 left over after the gift to Gloria. If they use this leftover equity to pay their new mortgage spread over 5 years it would still require $230/mth to pay the mortgage payments over and above the leftover equity. They felt this was a manageable debt knowing that in the 5-year period they would also pay $21,000 of the principal off the new mortgage as they made their payments. In the end, the payments would be made with the leftover equity and the amount of principal that would be paid down.

Gloria would need an income of about $120,000/year to qualify for the mortgage.

Where this strategy is useful is when a homeowner is planning to sell their principal resident in the next 5 to 10 years. What essentially, they are doing is shifting their equity to their children while they are alive rather than waiting until the equity is disbursed by way of an estate.

The other benefit is that if they wait and Gloria buys her first home using equity from the estate 5 – 10 years in the futire, the values of homes will have escalated dramatically. This is not so much an issue if there is one child as they will capture the increase in the value of the estate property, but with multiple children waiting for 5 – 10 years, as Real Estate prices rise, it may keep them on the sidelines still unable to purchase their first home. In the event the values increase 5% per year, the semi-detached home currently worth $633,000 would be worth around $800,000. One given is a first-time buyer cannot out save the increasing market even with the help of a future estate. These conversations can be challenging,  however they benefit kids in the future.

There are many ways of creatively entering the Real Estate market. If you are interested in exploring how to use the equity in your home to help your kids, I can be reached at lindsay@buyselllove.ca or 905-743-5555

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