Helping The Next Generation Get Into The Housing Market
As a father of a young and growing family in BC, I know all too well the struggles my generation is facing when trying to get into the current high-priced and fast-moving real estate environment.
A recent article noted Vancouver as the third most expensive city to live in the world and the most expensive in the whole of North America when comparing income levels to the property prices. To put that in perspective, that’s behind the likes of New York, Paris, London and Dubai, which is quite the shocking statistic.
So, it’s no wonder many younger generations who are yet to get into the market feel like they are swimming against the tide.
I have personal experience with this. When we were looking for our first property big enough for a growing family, prices felt very high, and being able to save for a down payment, and qualify for a mortgage was very difficult to do.
Fortunately, we were one of the lucky ones, who were able to purchase a townhome just before the pandemic, when prices rose even more dramatically, and just as importantly, we were fortunate enough to have help from family to get us there.
As the saying goes, necessity is the mother of invention. So more and more often, people need to find creative solutions to get into the property market and achieve the goal of homeownership. As licensed mortgage brokers, we’re always finding creative ways to help people make their real estate dreams a reality.
In this article, we will list some of these creative ways that parents and grandparents can help their children and relatives get into the property market and realize their dreams of home ownership.
We’ll outline the most common solutions and ways parents, and grandparents can help their kids and grandkids, including gifting a down payment and sourcing the gift, co-signing, acting as a guarantor, multi-family living, and early estate planning, which all have different pros and cons and will suit different people’s needs.
1. Gifted Down Payment
With rising prices and living costs, often a big difficulty for first-time buyers is saving the down payment needed to purchase a property.
Fortunately, in Canada, you can purchase with as little as a five per cent down payment, or even 0% if borrowing a down payment in some cases (if you qualify for the extra borrowing costs).
In reality, the time it takes to save even five per cent is often so long that the market has increased beyond what you originally thought you’d need.
The result is that it’s becoming more and more common for first-time buyers to have a portion of their down payment gifted by family.
A gifted down payment is when a person giving the gift (“giftor” ) signs a letter stating that they are gifting funds to help with a down payment when buying a property. The reason they need to sign this document is that if the funds are borrowed, the lender will need to factor the repayment terms into the borrower’s debt service ratios, which most often will make it much more difficult to qualify for the mortgage.
Many families, parents or grandparents will gift funds for the down payment and sign the letter, which legally will confirm there is no obligation for the gifts to be returned. However, between them, there may be an informal arrangement behind the scenes to pay the funds back in years to come, or buyers may plan on paying them back themselves anyway (even though they are not obligated).
The key thing is that whoever gives the gift knows they will need to sign a document explicitly stating there is no expectation for the gift to be repaid, and they legally will have no recourse to get the funds back.
Now we know what a gifted down payment is and how it works in practice. How can you source a gift if you don’t have significant savings or investments sitting there ready to go?
There are a few ways to do this, and all of them involve releasing existing equity in your property. These three most common ways are listed below, and we will review them in turn:
1) Refinancing to release equity,
2) Using a secured line of credit, and
3) Reverse mortgages.
Refinancing: A refinance is replacing your existing mortgage with a brand new one. With the rise in real estate prices, those who are already in the market have built significant equity that, if they qualify, can be accessed via a refinance.
For example, let’s say your mortgage is $300K, and your property is worth $1 million. You’re able to borrow up to 80% of the property value through a refinance. Therefore (assuming you’d qualify income-wise), you would be able to refinance and replace your existing mortgage with one up to $800K, releasing potential extra equity of $500K.
It’s been common for people to do this type of thing and release funds for all sorts of reasons, including the purchase of a rental/investment property, consolidating high-interest debt, buying a vehicle and investing. Or, as relevant for this article, to help a family with a down payment on a property.
Home Equity Line of Credit (HELOC): Another option is to use a secured line of credit to gift the funds to the family. There are various mortgages that have these segments and options to borrow against the equity in your home. The benefit of this is that you have access to the funds as/when you need them and only pay interest once you use them. There are even mortgage products that allow you to port the HELOC segment back into a mortgage segment at a lower rate, so you can pay it back over time.
This is a great option if you’re planning for the future but don’t need the funds right away. You’ll be able to access however much you want to borrow to gift as a down payment, as and when they are needed.
Reverse mortgages: This is another way to access funds to use as a gifted down payment. More on reverse mortgages and how they work is discussed towards the end of this article.
2. Act As A Co-Signer
Lending criteria have become stricter over the years, so a co-signer can be a useful way to qualify for a mortgage that otherwise wouldn’t be possible, and it is becoming an increasingly common way for parents, and grandparents to help their kids get into the housing market.
So, what is a co-signer?
A co-signer is somebody who will be added to the title and the mortgage with the owners and be equally responsible for the mortgage. The benefit of this is that even if that person isn’t living in the property, you can use their income to help qualify.
Let’s say, for example, a young couple, Jack & Jill, have found a townhome that they love. Jack is working with a full-time income. However, Jill recently graduated and is now a self-employed physiotherapist.
As Jill is self-employed, she’d need two years’ worth of income before it can be used with most conventional lenders. Therefore, even though they’d have the income to service the mortgage finance companies expect, on paper, the couple wouldn’t have sufficient income for what many lenders would require to qualify.
This is just one example of how buyers may not quite qualify for the mortgage size they need. In today’s high-priced environment, this is becoming increasingly common, so help is often needed.
Fortunately, Jill’s father, Dave, is mortgage free and has good levels of income coming in. So, he offers to co-sign for Jack and Jill to help them qualify. All three would be on the application and on the mortgage and title for the property.
The key thing to bear in mind if you’re considering co-signing is that you will be responsible for the mortgage should the buyers not make their payments, and this mortgage will also now need to be factored in should you wish to take out any further financing; the co-signer will need to qualify for both mortgages.
That’s why most commonly, this arrangement is a short/medium-term solution to help buyers get into a property before they’re able to qualify on their own.
In our example, once Jill has her two years, she and Jack can refinance and qualify on their own, taking Dave off the title, so he no longer has the obligation. This solution is great between
Families usually only occur in these types of situations as there is a high level of trust between all parties.
3. Act As A Guarantor
A guarantor is another solution like a co-signer but slightly different. A guarantor is someone who isn’t on title. However, they are there to guarantee that mortgage payments will be made if the borrowers get approved.
The most common situation when a guarantor is used is when credit is weak or too low, rather than income. If more income is needed, lenders would often require the other person to be a co-signer and be on title.
However, a guarantor can be a useful solution for clients who perhaps have low or non-existent credit due to various issues.
4. Multi-Family Living
Multi-family living has been commonplace throughout the Lower Mainland for a while and is becoming increasingly popular amongst buyers who can’t quite qualify for what they want or need on their own.
I’ll use a personal example to demonstrate why multi-family living can be such a great solution, as we are in a situation where we are considering multi-family living to make the next jump from a townhome to a single-family home.
If we wanted to get into a single-family home with square footage above our townhome, the minimum price in today’s market would be $1.3 million or higher in our area. This would mean needing a million-dollar mortgage. Which, even if we did qualify, is something we’re not comfortable with.
A possible solution that’s been discussed has been purchasing with my brother-in-law. He is not yet in the real estate market and feels priced out with what he’s able to get. However, has a good income and has saved a good down payment amount.
If we were able to stretch our budget to $1.5 million for a house with a suite, my wife and I could be responsible for two-thirds, and brother-in-law one-third. Our total real estate cost would be $1 million. His would be $500K.
By pooling resources, we can get much more for our money. We will be able to make the jump into the single-family home market with a lower mortgage, and he will be able to build equity in a property with more outside space.
Down the line, when he has enough, and we do as well, having built equity ourselves, we can buy him out, giving him the return on his investment from being in the market and some nice equity to make the leap into a place of his own.
You can quickly see that by pooling resources, you can make leaps into property brackets that wouldn’t be possible on your own, and for less cost. This has been a common practice for large families with many generations living together under one roof.
Having multiple different full-time income earners and resources for the down payment can make a significant difference in affordability.
We’ve recently had clients who are sisters who purchased 20 acres in the interior of BC together when on their own, they would never have been able to afford this size of land. Long-term, they will be able to build their own houses with plenty of space for both families.
The reason multi-family living works is that properties “twice” the size aren’t always twice as much. So, by being able to stretch your budget and have family members, or even close friends, purchase with you, this can be a great solution.
5. Early Estate Planning
Early estate planning can also be a way to help younger generations get on the property ladder while having the benefit of allowing parents/grandparents to enjoy and see where their family wealth has been utilized while they are still alive.
The simplest way is to review your Will, and if there are any large amounts of funds, you plan to leave to younger generations, distribute these earlier. This will have the benefit of helping now, so they will see the long-term benefits (i.e. by buying into a rising market earlier), and you’ll be able to see the results and have input on how the funds will be used.
What if you don’t have significant savings or investments, personal or corporate, but own your own property and want to use equity to help younger generations? How can you do this without overburdening yourself with mortgage payments, or if you no longer have high-income levels to qualify for a mortgage to release those funds?
Reverse Mortgages
Often, people’s biggest asset is their home. Reverse mortgages can be a way to access the equity in your home, even if you have low income and challenged credit. Although reverse mortgages have got a negative reputation over the years, they can be a great solution for people with significant equity in their homes that want to access them. So how does a reverse mortgage work?
Reverse mortgages work as you receive payments from the mortgage company, either frequently (e.g. once a month) or in a lump sum. You don’t need to make payments like a regular mortgage. The reverse mortgage is only paid back when you move out of your home, sell it or the last borrower passes away.
Therefore, if you had plans to leave your property to your family in your Will, it could be a way to help them gain access to some of these funds earlier.
It is important to note these mortgages are designed for older clientele, so you must be 55+ and own your home to explore this option.
Summary
This article has outlined some of the creative solutions that parents, and grandparents can use to help younger generations with their real estate aspirations. In times when prices are higher than ever, more and more frequently, these types of creative solutions are the best way to help combat the rising costs of living in Canada.
Giles Jordan, Licensed Mortgage Broker & Lead Underwriter
The Morrison Mortgage Team