The next round of parent financial support for adult children: Mortgage payment assistance

It seems like you can never close the book on the cost of parenting.

Life event after life event, parents’ financial obligations increase. Helping your children with the cost of university or college has extended to financial support after graduation, which has extended to large sums of money for down payments on the house. Now that mortgage rates are skyrocketing, we are entering another phase.

Parents who have put down a down payment on a home, here’s a question for you: How will your kids fare if their mortgage costs skyrocket? Given the latest thoughts on inflation, rates still have room to rise. Payments for variable rate and fixed rate mortgages could be strained.

Parental home buying assistance has been around for generations, but the amount of assistance has recently reached enormous proportions. According to a study conducted by CIBC Economics last fall, almost 30% of first-time home buyers received an average of $82,000 from their parents; in 2015, nearly 20% of first-time buyers received an average of $52,000.

Parents have brought their children into the housing market by helping them build up down payments that otherwise would have taken years longer to accumulate. It made sense in a world where interest rates were low, prices rose all the time, and making a down payment was a bigger issue than mortgage payments.

Rising interest rates have upended this logic and made getting a mortgage the real challenge. If recent buyers aren’t already experiencing higher mortgage costs, they will in the months and years to come. Monthly costs could rise by hundreds of dollars as households try to keep up with soaring prices for groceries, gas and more.

Whenever I write about the financial challenges facing young adults, I hear from older baby boomers and seniors who endured the inflation and interest rate spikes of the early 1980s. and to say that it was as bad, if not worse, than anything today.

Here’s how unique today’s world is: We’re just emerging from a years-long home-buying spree, based in large part on low interest rates that set the stage for higher price continues. To an unprecedented extent, we had a cross-generational consensus that the biggest mistake you could make with homes was not owning one. So the 2022 rate hike hits a market where prices are up 44% from two years ago.

Advice to recent buyers and their financial parents: Don’t focus on prices for the next few years. Average resale prices are still above year-ago levels, but have been falling rapidly since February’s peak. More declines may be ahead, but does it really matter if you bought a home to start or raise a family, and you’ll likely be there for more than five years?

Monthly mortgage affordability is by far the biggest issue for recent buyers. Monthly payments on some variable rate mortgages have already increased. Other variable rate mortgages are approaching a point where their payments are adjusted up. Changes have so far been in the background, with lenders using more payments to cover interest and applying less to principal.

With a fixed rate mortgage, you are invulnerable to rising rates until renewal. It was okay to get a five-year fixed rate mortgage five years ago for less than 3%. Today, you’re looking at renewal with reduced five-year fixed rates close to 5%. Be prepared for payment shock, especially in cities across Ontario and British Columbia where prices have averaged the million-dollar mark and outstanding mortgage balances can be huge.

Parents, help for your child homeowners would practically take the form of money to pay off a mortgage balance. Renewing a small mortgage mitigates higher mortgage costs. Cash assistance can take other forms – helping with a mortgage payment, for example, or easing the burden on your children by helping to pay for expenses like summer camp for the grandchildren.

The rule for helping adult children with the cost of home ownership is the same as offering a down payment. First, don’t hurt your own finances. The cost of parenting book does not have endless chapters.

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