The Bank of Mom and Dad has become indispensable in major Canadian markets like Toronto and Vancouver, but an increasing number of Canadians could be imperilling their retirements.
First-time buyers typically represent about 40% of annual home sales, but they’re hardest hit by rising interest rates and the 200 basis point stress test. Enter the Bank of Mom and Dad.
“A lot of mom and dads are taking out home equity loans to help their young adult kids get into their first home, and that puts pressure on their financial stability and their ability to assure financial retirement, so any way you look at it, it makes demand for housing far more difficult.’” said Sheri Cooper, DLC’s chief economist.
“Assuming parents of young adults are middle-aged and nearing retirement, it makes it more difficult for them because they won’t have money to retire as securely. Home equity is priced against the prime and it goes up every time the interest rate goes up, so these are interest-only loans not being amortized and they’re not paying off the principal.
The Office of the Superintendent of Financial Institutions’ mandate is to alleviate risk to the banking system, but it’s also affecting Canadians’ ability to attain homeownership. Pulling out a home equity line of credit (HELOC) might be a short-term solution, but Cooper says it aren’t wise.
“It’s one thing to borrow against your home to renovate it and add value to it, but it’s another to give it away,” she said. “You can find yourself in retirement with a significant debt load, which isn’t the prudent thing to do.”
Frances Hinojosa, a mortgage broker and managing partner at Tribe Financial, hasn’t noticed HELOCs on the rise, but she’s observed parents already dividing assets among their children.
“They’re realizing they should pass on inheritances earlier,” she said. Most financial advisers would advise parents to divide assets while they’re still alive and that way they avoid paying taxes.”
She added that it’s a far less risky than taking out a HELOC.
“It’s the smart way of going about it. If you already know where your estate is going to go—if you have three kids and they get equal share of your estate and you don’t need those funds immediately, why wouldn’t you gift it to them before you pass on and your estate has to go through the probate process? It’s smart financial planning.”