Another interesting topic that came up at CPFC15 was the concern that First Home Purchasers. They are relying more and more on Parental help with the transaction (monetary help, as well as advisory help).
I have spoken a few times about how both sets of parents helped my wife and I purchase our first home (leading to the Best Financial Advice Given ever). I don’t think parents helping kids buy their first homes is new. In our case, my parents helped us ensure we didn’t have to pay CMHC Loan Insurance premiums. My wife’s parents helped with furniture purchases and repairs in our first home.
Is this a good or bad thing? As usual, it all depends on the situation.
This is mostly a good thing if the parents can afford to help out their kids. However, if the parents have to borrow money to do this, it is a very bad idea. There are scenarios where this might not be the best idea:
- If the parents loan the entire down payment on the house for the children, this is a bad thing. I always espouse that with all things, people are much more diligent and attentive to debt if they have “skin in the game” (i.e. their own money is part of the purchase). It also might create a sense of entitlement in the children. The Kids assume their parents will continually bail them out in challenging economic times.
- The money loaned can simply allow the “kids” to become very house poor and ties them down to a home that symbolizes being broke (to them).
- If the money is loaned because “the kids” don’t have a very good credit rating and can’t get a mortgage without a large down payment (or worse without a co-signer). Most times bad credit rating is earned, and maybe they are a lousy loan candidate?
Families and money sometimes are a very bad mix. Both parents and children should think carefully before there are large monetary transactions “between them”.
My wife and I will absolutely defer our retirement in order to get our kids established. One day we’d love to be able to help them buy their first home.
In practice though, I don’t imagine we’re going to just hand over a big cheque. I’d like them to return home for a year or two after school and save for their first home. It’s part of our teaching them budgeting, investing, and cash flow.
I think a lot of people do this without thinking though – that’s the problem. We’ve discussed and determined all of this though, it’s a deliberate choice we’ll make if necessary. Getting our children ‘well’ established is more important to us than our own early/normal retirement dates. Most people would disagree with that though.
If the kids understand the sacrifices you are making, and have some skin in the game, it is your choice to do as you want (it is your money). I think my concern is the folks out there saying, “Parents should expect to help their kids out in the current housing market”, that worry me.
If parents don’t allow their kids to struggle and make it on their own, they’ll never develop the skills to survive in the world. Taking on mortgage debt and leraning to pay it off on your own is a great skill to acquire. Parents should stay out of it and let the kids sink or swim. I’m certainly not going to jeopardize my retirement funds and retirement life helping out my kids who have 2/3 of their life left to figure it out.
I think if parents can help out their kids without putting their own retirement in jeopardy and also not ruin kids’ financial life, then go for it. You summarized it very well.
I think it is up to the parents. Some want to pay for education, some want to help with houses, but as long as they aren’t crippling their own retirement, that is what is important.
I never had to borrow money from my parents when I purchased my first home at age 21. I made sure to have a down payment, savings account and a full-time job. I also had no debt. I would never have purchased a home if I had to borrow money from my parents. That just means I’m not ready yet. It might not for anyone else but for me.. no chance.
Well stated! ðŸ‘