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Tips for helping your children buy a home without impacting your retirement

Dec 13, 2021 | RBC Wealth Management


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No matter how much help you end up providing your children or grandchildren, it's important it doesn't come at the cost of your retirement planning.

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When it comes to buying a home, the general consensus is that your monthly costs shouldn't exceed 30 percent of your income. For first-time homebuyers who are still in their early earning years, this makes the dream of having a white picket fence just that: a dream.

In many cities, starter homes can cost anywhere from $300,000 to $700,000. With a 2020 median household income of $67,521, most young people simply aren't able to save the $60,000 or more that would be required to cover the typical 20 percent down payment, let alone qualify for a mortgage.

Of course, that's assuming they can find a house to bid on in the first place. In periods of low interest rates, there are typically more buyers in the marketplace. Many of these buyers are investors or downsizers who are able to offer all-cash deals or bid significantly above the asking price, making it impossible for a first-time buyer to compete.

For someone in their 20s or 30s looking to buy their first home, their parents - or their grandparents - may have the resources to help.

“There's such tremendous wealth in the Boomer generation," says Angie O'Leary, head of Wealth Planning at RBC Wealth Management–U.S. “The market's been good to them, they're on their retirement path or in their peak earning years, and they may be able to afford to help their kids out. For these people, it can be attractive to pass some wealth onto their kids now—when they need it—instead of as an inheritance decades from now when their kids are already in their own peak earning years."

Providing a loan through the family bank

There are three general ways you can financially help your adult children buy a home:

  1. Provide an intrafamily loan
  2. Money as a gift
  3. Co-sign a mortgage

Of these options, a combination of intrafamily loans and gifts often creates the greatest advantage.

“Parents or grandparents can make an intrafamily loan using the applicable federal rate," explains Blake McKibbin, a wealth strategist at RBC Wealth Management–U.S. The applicable federal rate is set by the IRS as the minimum interest rate that must be charged in order to avoid triggering gift taxes. “Because this rate is significantly below today's mortgage rates, this option can save children hundreds of thousands of dollars in interest."

An extra bonus: loans from parents or grandparents don't involve the same down payment requirements, credit checks, closing costs and mortgage insurance requirements as loans from a traditional lender, which means kids can buy a house they might not otherwise qualify for.

Additionally, McKibbin notes, a portion or even all of the loan payment can be forgiven by leveraging the annual gift tax exclusion. “In 2022, family members have the ability to forgive up to $16,000 per person per year," he says. For a married couple buying their first home, this equals a combined forgiveness of $32,000 a year. On top of that, if your spouse also chooses to give the $16,000 maximum amount per person, that's a grand total of $64,000 that can be used to help purchase a home.

In order to avoid legal or tax problems, it's important that any intrafamily loan is properly documented. “You should work with an attorney to draft a promissory note," says McKibbin. “Also, you need to make sure to report the income received from the interest payments on your tax return, so you don't run afoul of the IRS."

For parents who want to help their kids but may not have the liquidity available, co-signing a mortgage is also an option. Keep in mind that while this can strengthen the children's application and improve their chances of being approved, this method creates risks such as shared legal responsibility for the home and impacts to the parents' credit score.

The impact of financial assistance on retirement and estate planning

No matter how much help you end up providing your children or grandchildren, it's important it doesn't come at the cost of your retirement planning.

"If it's important for you to be able to provide that assistance, you should build that into your wealth plan so you can accomplish that goal while still planning for the future," O'Leary says.

McKibbin points out that an intrafamily loan or gift can act as a form of arbitrage. By providing financial support at below-market rates, parents are able to help their children invest in a home with the chance of it appreciating in value. Instead of this same money sitting in the parents' account and gaining value, it has the potential to grow under the child's name, effectively transferring the future wealth in a tax-efficient way.

Your financial advisor can help you determine whether this strategy is appropriate for your current financial situation, long-term retirement goals and estate planning wishes. However, one thing only you can determine is the impact on your specific family dynamics.

"For example, if you have more than one child—or are a grandparent seeking to help a grandchild—it's important to consider whether you can provide this same assistance for other family members in the future, should they ask," O'Leary says.

The bottom line: Clear communication with your financial advisor and family members is the key to protecting both your retirement and your relationships. Whatever you decide to do, be sure to consider the financial and emotional ramifications it could have on your future and that of your loved ones.

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Wealth planning