Helping your kid buy a home? Gift, loan or cosign: here’s what each one actually means

You want to help your kids buy their first home. What’s the best way to do it? 

It’s a question Collin Zwickel, Portfolio Manager and Wealth Advisor at RBC Dominion Securities, hears often. And the answer usually isn’t about how much money to give. It’s about how to give it: as a gift, a loan, or by co-signing the mortgage.

Let’s break it down and make it make sense.

A gift is the simplest for lenders, and nobody pays tax on it. 

A loan protects family money, but it can shrink the mortgage your child qualifies for. 

Cosigning makes you responsible for the whole mortgage. 

The key is to decide how much you can afford before you decide how to give.

Option 1: Give it as a gift

“A gift is a gift. It’s non-recallable,” Zwickel says. “Once it’s given, it’s your child’s.”

Canada doesn’t tax gifts, for you or for them. But your child’s lender will want:

• a signed gift letter saying the money doesn’t have to be repaid
• proof the money came from your account
• proof it landed in your child’s account

Most lenders only accept gifts from immediate family: parents, grandparents and siblings.

Option 2: Lend it

A loan is how a lot of parents protect family money. If your child’s relationship ends, whether they’re partnered now or meet someone down the road, a documented loan gives you a way to get your money back, while a gift may not.

Yes, asking your kid to sign a loan agreement can feel awkward. Zwickel’s take: loan documents are “most important when everyone’s getting along.” He says that’s exactly when nobody minds signing.

Have a lawyer draw it up. At a minimum, the agreement should spell out:

• the date and how much you’re lending
• whether you’re charging interest and how much
• how and when your child pays it back, or whether it’s only due when or if they sell
• what happens if they sell, separate or stop paying
• whether the loan is secured against the home, which is the strongest protection but needs the lender’s approval
• signatures from you and your child, and from their spouse or partner if they have one

It’s important to know that your child’s lender will count a repayable loan as debt, which can lower how much they’re able to borrow from the bank overall. Talk to the lender before you settle on the terms.

Option 3: Cosign

“If you’re cosigning for your child, you need to be very aware that you are on the loan documentation and you are liable for the loan,” Zwickel says.

If your child misses payments, the lender comes to you. And the mortgage shows up if you apply in future for credit, which can limit what you can do for your other kids or yourself. 

Before you give anything, protect yourself

Zwickel says, “This is one time I can say the parent should be very selfish.”

His framework is three questions:

1. What will you spend over the rest of your life?
2. What have you built?
3. How long does it need to last?

He stress tests the answer against a 20% market drop.

Then look beyond the price. Property tax, strata fees and upkeep all land on your child after they move in. Zwickel’s goal is a home where “the monthly spend is something that is comfortable for all parties.”

Have more than one child? Map out a plan now to keep things fair over time, whether that’s real estate, cash or investments.

And start early. Zwickel says to notify the person managing your money as soon as you start thinking about helping your kids.

Another smart way to help

You can give your adult child money to put into their own First Home Savings Account. They get the tax deduction, and the money grows tax-free until they buy. Here’s how the FHSA fits with other first-time buyer programs.

FAQ

Do I pay tax if I gift my child money for a down payment?

No. But selling investments to raise the money can trigger capital gains tax.

What should a down payment gift letter include?

Your name, your child’s name, your relationship, the amount, the date, and a statement that the money doesn’t have to be repaid. Most lenders have their own template.

What’s the risk of cosigning my child’s mortgage?

You’re responsible for the full mortgage if your child doesn’t pay, and it counts against you when you apply for credit.

Sources: Canada Revenue Agency; Canadian lender guidance on gifted down payments, with expert input from Portfolio Manager and Investment Advisor Collin Zwickel of RBC Dominion Securities.