The housing market and family financial help
Our housing market has been buoyant, with low interest rates. So for good reason, our Federal government in Canada has imposed the “stress test” on mortgage qualification. It’s to ensure that however low and affordable interest rates might seem to be, mortgage borrowers (homeowners) will be able to afford rising rates and won’t end up losing their homes and their life savings, as happened to so many Americans in the post-2008 crash.
This has led to the rise of what are called “alternative lenders” – mortgage funds that represent the pooled investment funds of private investors. Because they are not trying to do all the things that a regular bank does, they don’t need licensing under federal banking legislation and they can lend outside the constraints of the Stress Test. Their market share has been booming.
Along with this trend is another one – the rise in popularity of the “Bank of Mom and Dad”. It’s always been there, but never more studied and recognised than in the current state of the financial and housing markets. Up to half of first home purchases seem to be happening in part with reliance on family financial assistance.
The investment market is watching this. There are trillions in family wealth poised to be passed down and inherited by younger generations as the current elders pass on, the Boomers become the elderly, and Gen’s X, Y, Z, and Millennial become the inheritors.
Long ago in law school, I learned about gifts “inter vivos” – meaning, during the life, not after it – as opposed to gifts that pass under a Will, only after someone has died. Now I’m thinking of how much more satisfying it can be when an elder can gift to their loved ones while they are still alive, and live to see the impact of their legacy. I’m a participant in this from both the consumer and the professional perspective. I’ve both received, and given, family financial assistance to achieve home ownership.
Bank of Mom and Dad to the rescue?
We can look really carefully at what it takes to help the Bank of Mom and Dad be more active in our currently problematic housing market. It helps to start with a good sense of what the elder generation needs.
Whatever stage of life they are in, Mom and Dad first need to cover their own future financial security. This can easily look like a selfish focus – how much freedom and luxury can their retirement savings get them? But slightly deeper thought reveals that it’s almost universal, that those family elders do not want to become a burden on their heirs. That’s at the heart of their concern for financial security, right alongside their personal “bucket list” and visions of luxuries like travel. Whatever they do with their accumulated wealth, they need to be safeguarding their own independent financial security, first.
The next concern is a nice problem to have – what if we stay so healthy that we outlive our savings? That circles back to the issue of our sustainable financial independence. You need to contemplate an optimistic life expectancy, but be ready for whatever curveballs life might throw at you with age. You might need to cover the costs of licensed residential care, and the plague of dementia.
Then there’s the sheer size of families. While the current birth rate is only 1.7 per married couple, it wasn’t always so and a lot of us Boomers have more than 2 kids. We might need to spread our limited capability to give financial support among more than one child.
The single asset with the bulk of the family financial security is usually the principal residence – and our federal government does not tax the value increase. Hence the gain of literally millions for families who own their homes in the most expensive markets. (In another blog I’ll explore how hard-working people should understand the way that most fortunes have been made in part by extracting real estate equity to accumulate other sensible passive investments.)
HELOC – The Home Equity Line of Credit
Say you’re in the mature stage of life and career. Your bank sees that you have a good credit rating, and are secure with ownership of a home that’s now got a mortgage either fully paid off, or paid down to less than 50% of value. With your kids grown and moved out, your monthly expenses are a fraction of what they used to be. This provides “lending room” to a financial institution, who’s raison d’etre is to get money out on loans in situations where it’s really well secured. A Home Equity Line of Credit is in that category (as is a Reverse Mortgage), buoyed by the likelihood that Canadian housing demand always seems to outweigh supply, and the costs of producing more of it keep rising. So housing values rise, too.
However much of an affordability crisis we have in our housing, it’s not really all that bad among those lucky families who have owned their housing over the years, while a rising market steadily added to the non-taxable value gain.
Enter the Bank of Mom and Dad
When the bonds of family love and devotion join the financing techniques that spring from home equity, we might actually have the resources to cover the housing challenges of up to 70% of our younger generations. That’s the percentage of BC’s Boomers who are homeowners. Across Canada, it’s even higher, at 77%.
Maybe it’s time for more home equity holders to step up and invest to create housing opportunities for their younger family members. And it’s time for a financial program that makes it relatively easy, and quite secure, for families to do this for their own loved ones.