How to buy your kids a house
This is the title of an article in the Financial Post from this weekend. Chalk this one up to a sign of the times.
Many Baby Boomers have paid-for homes, while their grown children are contemplating entering the housing market. Instead of letting them rent during their first foray after leaving the nest, it’s tempting to buy a second “investment” property with Junior as the main tenant.
Fully 10% of Canadian parents are considering this, according to TD Canada Trust
But what’s interesting is that the article goes on to mostly discuss various ways to structure the mortgage so that the kids DON’T pay rent and instead wind up with a house that the parents have essentially subsidized.
Jamie Golombek, managing director, tax, with CIBC Private Wealth Management, favours a zero-interest mortgage, which is “easy, tax-effective and guarantees mom and dad can get their money back should they wish.”
Alternatively, you could waive principal repayments during the course of the mortgage; ultimately, the parents forgive the debt entirely, essentially gifting the loaned funds to the child.
Lord forbid they actually SAVE for a down payment, manage their finances accordingly, and then build their wealth without mommy and daddy holding their hand. Take off the training wheels and cut the cord already! Is it any wonder we have a generation so absolutely clueless about how to manage their money?
Consider these previous posts:
Interestingly, the fantastic personal finance book, ‘The Millionaire Next Door‘ by Stanley and Danko termed this type of behaviour “Economic Outpatient Care”. They observed that when the children of wealthy parents need a continuous influx of income from their parents to support their desired lifestyle, several things occur:
1) The children typically do not end up with anywhere near the same level of wealth accumulation as their parents.
2) The wealth of the parents tend to last only one generation, being squandered by the children.
3) The parents themselves end up with considerably less wealth than their wealthy peers later in life.
Beware of this. We have a generation of relatively clueless individuals when it comes to managing finances. We also have a younger generation that increasingly views their parent’s home (which typically took them a lifetime of hard work to own) as the new ‘starter’ home. Our expectations of what we are entitled to and what is ‘normal’ is extremely anomalous in the context of our own Canadian history. I’ll suggest that this will not last as the credit bubble that has allowed this new mindset to exist by providing the means for young home owners to purchase larger and nicer homes than their parents is now on borrowed time.