What you need to know about helping your child with a down payment

Here’s what you need to know about helping your child with a down payment to buy a home.

If you have a child looking to buy their first home, you probably know how hard it is for young people to enter the housing market these days. But you might actually be in a great position to help, by tapping into your home equity.

And with a Manulife One account, you can use the borrowing room you’ve built in your Manulife One to gift your child money for their down payment, without setting up a HELOC or refinancing your mortgage.

Here’s what you need to know about helping your child with a down payment to buy a home.

Giving the money as a gift

If you’re giving the money to your child as a gift, the money must be a gift, not a repayable loan. Your child will need to provide a gift letter to their lender with the following information:

  • Your relationship to the person you’re giving money
  • How much money you’re giving
  • The property the money is for
  • Specify the money is a gift, not a repayable loan
  • Your contact information
  • The source of the funds being gifted

The specific requirements may vary depending on your lender, but if your child is getting a mortgage with Manulife Bank, we’ll provide the gift letter and you’ll just need to add the required information.

If your child has no down payment of their own, or has less than 5% of the price of the house, your gift needs to get them to at least 5% of the price of the home they’re buying to qualify for mortgage default insurance as part of the application process. However, if your gift is for 20% (or more!) of the price of the house, your child won’t need default insurance.

Giving the money as a loan

If your child doesn’t have a strong credit history or high enough income, they may need you to co-sign their mortgage, which would add you to the property title and you would co-own the home. This is important to consider, because if you’re listed on the title and your child re-sells the home, you may have to pay capital gains tax if the home isn’t your primary residence. Some banks might allow you to be a guarantor rather than a co-signer, where you’re guaranteeing the payments, but you aren’t on the property title.

Of course, these options have some risk. You’re responsible if your child falls behind on the payments, and your financial institution could see you as a higher risk if you apply for loans in the future.

What happens if your child gets a divorce?

Nobody wants to think about it, but it happens. You’ll need to decide if your gift will be conditional on a pre-nuptial agreement to protect your gift if your child’s relationship ends.

The need for a pre-nuptial agreement will all depend on the separation/divorce laws in their home province, so you should consult a lawyer for guidance if you want to go this route.

How to gift money from your Manulife One account

Giving the money is simple – you can simply transfer the money to your child or write them a cheque. Once again, having a Manulife One account makes this even more convenient.

With Manulife One, you can track that money separately within your account, using either a tracking or term sub-account. A tracking sub-account has the same variable interest rate as your main account, with interest-only or principal and interest payment options. A term sub-account has its own fixed or variable interest rate and amortization period, with consistent interest and principal payments, like a traditional mortgage. Learn more about sub-accounts.

To learn more about sub-accounts, call us at 1-877-765-2265 to discuss your options, or sign into online banking to set up a sub-account today.