How to finance a home for your children
In your case, Deanna, you can borrow against your home using a line of credit or mortgage. The benefit of using a line of credit is flexibility and lower payments. Most secured home equity lines of credit (HELOCs) require interest-only payments. Mortgages, on the other hand, have blended payments of interest as well as principal. The benefit of a mortgage is lower interest rates than a line of credit, but with a mortgage your cash flow is impacted by the higher payments.
If you see this as a short-term debt for a few years before you downsize, I can understand your reasoning. If you are not ready to downsize, but your kids are ready to move out, it may be a way to access that home equity without having to rush yourselves or delay your kids. The short-term interest cost may be a small price to pay for all parties.
You will have to go through the same approval criteria as a borrower for any type of credit, so if you are retired, you may have more difficulty qualifying with a lower income or an income derived primarily from investments. Reverse mortgages are always an option if traditional bank financing proves insufficient. Just be careful about compromising your own retirement for your kids. Home prices could also fall in the future, as they have as of late, and you may not net as much from selling your home as you hope you will.
If you have investments, especially in a taxable non-registered account or tax-free savings account (TFSA), there is a strong case for using these before borrowing right now. You would need to be earning a higher after-tax rate of return on your non-registered investments or a higher TFSA return than your debt’s interest rate to come out ahead. This may be difficult for anyone, and conservative investors in particular, when the bank’s prime rate is 7.2%. The rates on HELOCs are typically prime plus 0.5% to 1%. Mortgage rates may be a bit lower.
Should you buy a home for your kids using the equity in your own home?
One thing to be mindful of for parents is that if your kids cannot qualify for a mortgage on their own, that is a good sign they will not be able to afford the home you are helping them to buy. If you are planning to gift the funds and you do not need or want the money paid back to you, that may be a different story. But you still need to be careful about helping your kids buy more home than they can afford.
It sounds like your intention, Deanna, is to buy and own this home yourself and have your kids live in it. You can do that, but you will need to decide with your kids who will be paying for what expenses. It’s best to establish this ahead of time. They could cover some of the expenses, and you do not need to charge them rent. If you do, and the rent is equal to the fair market rent, you could treat the property as a rental property for tax purposes. This would allow you to claim deductions against the rental income like mortgage or line of credit interest, property taxes, condo fees, insurance and/or other ongoing costs.
One drawback of having the property in your name instead of your child’s is that you will likely have capital gains tax payable on the property should it appreciates in value. If it was in a child’s name, they could claim it as their principal residence and have the growth be tax-free.
If you do buy and continue to hold it in your name, there may come a time when it is awkward for you to be the owner. For example, Deanna, if your child gets into a relationship and their partner is then living in a home that is owned by their in-laws. So, despite your best intentions, your child or their partner may want to own their own home as opposed to continuing to live under your roof, so to speak, until you die and they inherit the property.