Dear David,
Our son and daughter-in-law are hoping to purchase the house they currently rent and have asked us for help. They’ve been approved for a mortgage, but have not saved for a down payment. If we cash in our investments, we could lose our Old Age Security for the year and face a sizable tax bill. How can we help without risking our own finances or jeopardizing our retirement? – OLD MONEY
DEAR OLD MONEY: Your desire to help is commendable, but you need to avoid putting your own retirement at risk, even if it’s to help your children buy a house.
The fact that your son and daughter-in-law have no savings is a warning sign that they may not be financially prepared for home ownership. Getting mortgage approval for the “full amount” of their purchase doesn’t mean they can buy a house without a down payment. The lender will require proof of income and a down payment before the sale can close. Some mortgage programs may permit the use of borrowed funds, but these must be disclosed, and could affect their ability to qualify. Their mortgage broker will need to confirm the mortgage amount, required down payment, closing costs and acceptable funding sources. There will also be legal fees, land transfer tax, adjustments, moving expenses, insurance, repairs and possible emergencies.
Before you cash in your investments, ask your accountant to calculate the consequences. This could create taxable income for you, reduce your Old Age Security, and affect your retirement if you end up absorbing some of your children’s unpaid bills. If you are financially able and wish to help, consider establishing a maximum amount you can afford to give them permanently. A gift is generally cleaner than a family loan as repayment is not required, though it typically requires a signed gift letter. Some families are choosing to help their kids out earlier, but keep a rolling balance of gifts, so that everyone ends up with the intended amount when their estate is settled.
A documented family loan is another possibility, but your lawyer should prepare the agreement and repayment terms. This must be disclosed to the lender, who may prohibit secondary financing. An additional financial obligation could also reduce the size of mortgage approved.
PRO TIP: Don’t be pressured into a decision that affects your retirement. Start by getting a professional opinion of value on the house to ensure the purchase price is fair and in line with current market conditions. Have your son and daughter-in-law explore alternatives with their landlord. These could include negotiating a longer closing, agreeing on a price that reflects the landlord’s savings by avoiding a vacancy, real estate commissions and other selling expenses, or allowing more time to save a down payment. Sometimes the most responsible type of help is advice, moving assistance or a modest gift, rather than a large debt secured against your home. If retirement funds are tight, old money must be protected. Meet independently with your accountant and lawyer before proceeding, and have your son and daughter-in-law obtain their own professional advice. Your children may have many years to recover from financial setbacks, but you likely have much less time. #Advice #AskDavid #TheNegotiator