We all know Jim Flarerty has tightened up the mortgage rules effective July, 2012.
We now need a 20% down payment in order to avoid a high ratio mortgage insurance premium and we need to qualify at the Bank of Canada’s interest rate of 5%. As if it wasn’t hard enough already getting into the market as a 1st time Buyer!
The Globe and Mail reports that the average renter has only $5,000 saved in the bank…considering TREB just reported that the average price of a home in Toronto is $519,879…your $5,000 is a good start… but is not going to get you very far.
As prices in Toronto continue to increase – A lot of 1st time buyers are turning to a place they likely have turned to over past 25-30 or so years:
The Bank of Mom & Dad!
Instead of renting a place (aka. paying off someone else’s mortgage) – it might make sense to borrow the down payment from your parents now and get yourself into the market.
There are pro’s and con’s to borrowing from The Bank of Mom and Dad. Borrowing say 20-50k is a serious loan and should be thought through carefully. Here are a couple of items you should consider:
- What are the re-payment details? Is it an interest free loan, a gift or are they charging you interest? What are the terms? Don’t be afraid to put things in writing. This is a business transaction and loaning this amount of money is a big deal.
- Will you be charged guilt on top of your principle & interest? If you and your friends want to take a Caribbean cruise for March break…will they make you feel guilty? Having clear re-payment terms/schedule should help with this.
- Do they want a say in the details of the house/condo? Do they expect to help you pick a suitable house/condo? Do they want to purchase this as a joint investment?
- I don’t know your relationship status…maybe you are single or maybe you have a partner? Unfortunately almost 50% of marriages end in divorce…so you need to get serious about the possibility of your relationship status changing. You also need to consider what happens if your parents split up. If you’re single…what if your partner moves in and you get married? You should discuss these scenarios with your parents and partner.
- What does this mean for your siblings? If this is a gift… are they planning on doing the same for your sibling? Are they taking this off your inheritance? Do your siblings expect the parents to provide them with the same help? What position does this put your parents in?
Who would of thunk? Just trying to make sure you have all your bases covered.
Borrowing money from The Bank of Mom and Dad can be a great way to get into the market and allow you to enjoy the benefits of home ownership. Make sure you have open communication with your parents about all of these details before you move forward!
On another hand…maybe you should revert to the: “Failure to Launch” approach and move into your parents basement? I’m sure they would be more than happy to hand you over the money free of any conditions!!!
