In May of this year, the National Bank of Canada released its Housing Affordability Monitor for Canada. The report states that despite a recent rise in housing affordability due to rate cuts, rising income and softer housing prices, a typical mortgage payment on a home still represents 58% of pre-tax household income.
It’s no secret that young Quebecers are priced out of home ownership. While the way out is not clear and would need to include a multi-tiered approach of monetary policy, faster home building, debt reduction and more, there are some that can take advantage of the wealth accumulated by their parents’ generation.
And we’re not just alluding to the “boomerang” trend of children moving back in with their parents to save money. While “boomeranging it” is a privilege and a good way to save money, there are faster, more effective ways for parents who own their own property to help their kids be able to afford a home.
In fact, according to the Canadian Market Housing Report for 2024, 48% said they used money from their parents, relatives, or their partner’s parents or relatives for their down payment.
But what if the parents don’t have a lot of cash on hand or don’t want to dip into their retirement funds?
For those parents who happen to be homeowners, there are other solutions. Yes, we are talking about Equity.
What is equity? To put it simply, equity in home ownership refers to the difference between the market value of your home and the amount you still owe on your mortgage.
This equity can be turned into cash that can be used for many reasons including paying off debts, renovating the property or in this case, helping your kids make a down payment on their first home.
Many Canadian homeowners are not aware that they can access their equity to unlock cash or are not well versed in the many different strategies that are available to do so. Others know about it but have misconceptions or reservations that make them rule out this otherwise viable strategy.
So how can parents help their kids purchase a home with their equity?
Taking out a second mortgage, getting a reverse mortgage to pull out funds, obtaining a home equity line of credit or refinancing an existing mortgage are 4 strategies that can put your kids on the fast track to home ownership.
You don’t need a six-digit balance in your checking account to help your kids. If you own your home and it has accrued equity over the years – meaning you owe much less than the value of the property, you can leverage that equity to borrow money with a second mortgage secured against your property.
Applying for a home equity loan means that a second mortgage would be taken on the property, so you don’t need to change your current mortgage – if you still have one. A second mortgage online application consists of filling out information on your property and your finances and verifying your identity. Once approved the loan is disbursed within a week after visiting the notary.
A home equity loan is a one-time lump sum payment that can be as high as 80% of the property value.
You can pay back the loan in one of two ways – with monthly or bi-weekly payments that include the capital + interest or interest only monthly payments followed by repayment of the capital amount at the end of the loan term. Loans can be taken out for a duration of 3 to 36 months (about 3 years), giving you the flexibility to pay it back in a way that is best suited to your financial situation.
A reverse mortgage is a financial product available to homeowners 55 and over. With a reverse mortgage you can take out up to 55% of your home’s value in tax-free cash without selling it. A major selling point of reverse mortgages is that the borrower doesn’t have to make payments until they sell the property or pass away.
Only primary residences – in which you live for at least 6 months out of the year – are eligible for a reverse mortgage.
Another way to pull out equity for cash is through a home equity line of credit (HELOC) . With a HELOC you have the possibility to pull out money when you want up to a maximum amount and pay it back as you go. Like a home equity loan, a Heloc is a secured loan that uses your property as a guarantee.
A homeowner must still qualify for a HELOC at the bank by going through a “stress test” to determine if they can afford to repay the loan at a higher rate than the actual rate on the contract. Obtaining a HELOC is not guaranteed with equity only.
Mortgage refinancing means negotiating a new mortgage to replace your existing one, offering a chance to adapt to your evolving financial needs. Parents looking into this option must still have a mortgage on the property to be able to refinance it. It would also be more beneficial to refinance towards the end of the mortgage term to avoid paying too much in penalties for refinancing.
Like applying for HELOC, homeowners that want to refinance will have to undergo the mortgage stress test. If they have paid down enough of their mortgage or if their property has increased in value, they can refinance for a larger amount and use a part of the loan amount to help their child get a down payment for their new purchase.
This article aims to illustrate that parents who own their homes are well-positioned to help their children achieve their own home ownership dreams. They can leverage their equity through a home equity loan, reverse mortgage, HELOC, or mortgage refinancing to take out a loan and help with their kids down payment. However, it's important to understand that this is not free money. Borrowers should find the right solution for their situation, ensuring they can comfortably repay the loan and create a win-win situation.
Time is also a factor in the equation. In Quebec, many fear that the lack of real estate supply and constant increase in price means that they need to act now before it’s too late. Others tend to be more patient, hoping to save money by living with their parents or staying in a low rent apartment and betting that home prices will go down soon.
Whatever decision you make, it should be well thought out and should take into consideration as many factors as possible!
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