Parents may dread the moment their teen first asks for the car keys. Nowadays, there’s another request they may fear even more: the day their adult child asks for money to buy their first home.

High home values have not made this an easy ask, even if average housing prices have tumbled as much as 25% from their highs in 2022. 1 For many would-be homeowners, prices have not tumbled enough. A home remains out of reach for many within the millennial and Gen Z generations, especially around the urban core of Canada’s biggest cities. 2 And although families typically finance their kids as they settle into adulthood, the size of the money transfers required today is becoming problematic, not to say stressful, for all involved. Funding your kid’s down payment may mean treading a thin line between funding a loved one’s aspirations and shredding your own savings, between making your kid happy and yourself uneasy.

Laima Alberings, a Tax and Estate Planner, Wealth Advisory Services, at TD Wealth, says because the sums of money needed to afford a home are now sizable, parents need to take precautions before they begin handing out money. Media reports say transfers of $125,000 are now common in urban centres. 3 If moms and dads are going to float their kid’s down payment, Alberings says some methods may be better than others, but all are dependent on the family’s situation.

“If Mom and Dad have to give $100,000 to their child for a home — maybe to more than one child —they must make a serious financial plan to ensure they can actually afford this transfer and be confident they are not causing money problems for themselves,” she says.

Is your kid eyeing real estate listings? Alberings says there is a list of options and ideas people should study before they lend or give away money to their kids. Each option comes with benefits and complications, but everything should be carefully considered with the help of a team of financial and legal professionals.

Transferring money is a personal decision

Before supporting a child’s home purchase, Alberings suggests parents sit back and ask themselves: “Is this really a good idea for everyone involved?”

“A loan or a gift must fit the economic realities and personal situation of the child. If they can’t afford a down payment now, what will happen when they renegotiate their mortgage, or if expenses come up suddenly?” asks Alberings.

Signing a cheque over to an adult who does not have regular income, is going through a divorce or separation or is undisciplined with money, for example, may not be a good idea. If there are any red flags, you may want to rethink your decision.

Alberings says before you write that cheque, consider how to protect that money from divorce or separation proceedings or a child’s creditors. Ponder too, how you might balance a gift or loan to one child for a home and giving away the same amount to their sibling for something different, like assisting with their business start-up.

Ultimately, Alberings says parents must put themselves first. Before considering a substantial gift or loan, you should have a financial plan of your own which includes a comfortable retirement and funds for care as you age. Only once that kind of planning has been worked out, can you decide how much extraneous wealth you can part with.

Making it a gift

If both you and your child agree on a gift of funds, with no obligations attached and no expectations of it being paid back, simply giving a child money could be a transaction that suits you — especially since gifting usually doesn’t carry tax implications in Canada. In some cases, it may be thought of as an early inheritance. Both sides should agree, however, once money is surrendered, there is no recourse if one party asks for the funds back or starts setting conditions on the gift. If those impediments make you nervous, perhaps another way of transferring money is more practical.

Even if giving away money sounds simple and straightforward, there are some subtle difficulties people should be aware of, says Alberings.

These complications can occur when a parent’s estate is being processed. If, for example, one sibling says the $50,000 they received from their parents was a gift, but another sibling says it was actually a loan that should be paid back to the estate, it may cause acrimony and even result in litigation.

To prevent this issue, it is important that parents properly document the gift in writing, which in the legal world is called a “Deed of Gift.”

Making it a loan

If you wish to give your child money, but require that the funds be paid back, Alberings says a loan may be more appropriate. She emphasizes that it is important to see a lawyer to have a proper loan document prepared. An informal agreement decided over a family meal is not advisable since it could lead to conflict if family members aren’t able to agree on what the terms originally were. Moreover, an informal agreement may not stand up in court if it came to that, says Alberings.

She also points out that the child should make documented repayments on the loan. Again, this process actually helps validate the loan: A court may not view the transaction as a loan if there is no record of actual repayments.

In addition to giving parents some control over the funds, a loan also offers parents the flexibility of forgiving the loan at some point if they choose, either while they are alive or as part of their estate plan when they pass away.

Being a guarantor or co-signer to a mortgage

If a child has an insufficient or poor credit history, a parent can become a guarantor for their child’s mortgage. If a child can’t be approved for a mortgage because they have inadequate income for the payments or they have irregular income because they are a consultant or freelancer, a parent can be a co-signer for the mortgage. The benefit of either type of arrangement, Alberings says, is that the child can receive a mortgage and get a home even though they wouldn’t qualify on their own.

She says parents must examine these arrangements with a cool head. If an adult child can’t qualify for a mortgage, their parents assume the risk associated with the real estate transaction. If the child can’t make the payments, the co-signor or guarantor is on the hook and the lending institution may take action against both the child and the parent for non-payment. Moreover, if there are legal issues around repayment, those circumstances may prevent the parents from receiving their own loan from a financial institution.

Using a discretionary trust

A more complicated arrangement involves a parent arranging to purchase a property through a discretionary trust and then allowing the adult child to live there. This action doesn’t really provide an adult child with the financial responsibilities that come with owning real estate, but it does get them into a home. The adult child can only use the property in accordance with the terms of the trust and it should stipulate who has the right to live in the home and how the property should be used. This may protect the home from creditors or the fallout of a divorce or separation.

However, the downside of this type of arrangement is that the child is still reliant on the parent for accommodation, and they are not able to build any credit history from it. Using a trust with other arrangements — such as letting the child pay rent while living in the home or passing the property on to them in a Will — may be something a parent should discuss with their financial planner or advisor and lawyer. As well, there are costs involved with a trust as the arrangement would involve lawyers and annual administration fees.

Alberings says the housing situation in Canada has presented the parents of first-time buyers with some difficult decisions. One of the big changes to their financial planning has been a growing need for parents to transfer substantial sums of money to their children, potentially disrupting their current financial situations.

Ultimately, Alberings says parents and their children should consult a financial planner or advisor when evaluating the best way forward. A well-thought-out arrangement could be the key to helping your child achieve their financial goals, while protecting your money as well.