Let’s
say your children have finished university, found a job in their field of study
and are still living at home because …… they can not afford to rent an apartment
in the city (of Toronto), or have not even thought about saving for a down
payment on a house. Between paying off
study loan and living the good life that Gen Ys are used to these days, it is
no small wonder that the Bank of Mom and Dad has to come to the rescue when it
comes to home ownership. Do not despair
as you may wish to continue reading on.
There
was a recent report published by CIBC that indicated there is approximately
$750 billion to be inherited by Canadian baby boomers between the ages 50 to
75. On average, one can expect to inherit $180,000 in the next ten years. This
will represent the largest intergenerational wealth transfer in Canadian history.
In part, this holds true for mostly GTA-ians (Greater Toronto Area) as well as
people living in the Vancouver area due to the soaring real estate prices. Homes
and cottages purchased in these areas in the 1960s for $50,000 are now valued
in excess of $1 million to $2 million.
In
addition, inheritance from life insurance also form a vital part of the wealth
transfer. Both the gains from sale of principal residence and proceeds from life
insurance are also tax-free.
As
a life insurance professional as well as a recently qualified financial
planner, I have witnessed such transfers on numerous occasions , especially
when attending funerals of close friends and relatives. Most of the dearly departed (blessed their
souls) have left on average their principal residence to their children as well
as designated their children as beneficiaries on their life insurance policies.
With
this new found wealth, and with the fact that most baby boomers are already
well on their way to retirement or their planned retirement, the next best
thing for them to do is help out their children own a home. True, the $180,000 average inheritance will
not even qualify as a 20% down payment on a home in the cities these days, but owning
a new build condominium can be the next best alternative.
Consider the following scenario:
Purchase price of an average 1-bedroom condo in Toronto: $300,000
Completion date: 2-3 years
Average down payment required in the first year: 10% or $30,000
which the Bank and Mom and Dad fronts
Average Mortgage: $270,000
Rate: 4.64% (based on the 5-year fixed rate, new rules effective
October 17, 2016)
Monthly Mortgage Payment: $1,522 before Property Tax and
Maintenance Fees
Assume that in 2 years’ time prior to moving in, your child
has also saved another 10% or $30,000, one can avoid having to pay mortgage
insurance.
Also assume that on average, the condominium has appreciated 5%
annually over 2 years (this is totally realistic considering the state of the
housing market in GTA and Vancouver). In fact, real state has also proven to be
a good hedge against inflation.
The same $300,000 pre-build condominium purchased is now worth
$330,750.
Recall, the initial $30,000 down payment has now resulted in an
additional return of $30,750 or 102.5% due
to leverage.
Try doing the math yourself if you are unsure. Is this not the best thing you can do for your
children?
Disclaimer: I believe
the above assumptions are totally realistic as most people I talked to are fed
up with anemic stock returns and are putting their money in something more
tangible. The only people making above average returns on stocks are either
insiders who have privy knowledge, senior management getting stock options for hardly doing
anything, or the banks touting these stocks to innocent investors. Don’t get me
wrong, there are still a lot of great companies out there worth investing, but
one has to look beyond just stocks!
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