Should kids live at home rent-free while they save for a down payment?

With average first-time home prices topping $300,000 across Canada (and in British Columbia, the average first-time home costs $430,000), young people often struggle to save up for a down payment.

The minimum they’ll need is 5 percent ($15,000 if they’re buying that $300,000 starter home), but if they want to avoid paying mortgage default premiums, they’ll need to put 20 percent down ($60,000 for a home costing $300,000, but if the buyer was self-employed without income verification, he or she might still need an insured mortgage). Once you add credit card debt and student loans—not only financial burdens but also potential hindrances to mortgage approval—and it’s a tough climate for first-time buyers.

Given these conditions, it’s understandable that parents want to help their adult children get into the real estate market. Some parents do this by gifting funds for a down payment, but that’s not a realistic option for everyone. Perhaps the parents need to focus on saving for retirement or they feel it’s important for adult kids to work toward their own down payment.

Another solution is to give an adult child the chance to move back into the childhood home and live rent-free for a limited time while they save up for a down payment.

A recent Q & A in The Province offered advice to a father whose son and daughter-in-law wanted to do this, but the father was on the fence and wanted to make sure that the couple was serious about saving. In his advice, Scott Hannah, president of the Credit Counselling Society, offers some good strategies for setting expectations and ensuring that the couple is on the right track financially.

One solution not mentioned in the article is to collect rent from the adult children but put that money into a savings account earmarked for an eventual down payment. That forces financial discipline and ensures that the adult children are working towards their goal. One approach would be to estimate what the prospective buyer’s monthly housing costs are likely to be (including mortgage, utilities, taxes and strata fees, if applicable) and set aside that amount each month as practice.

Of course, if adults truly haven’t learned how to manage a budget or save for future goals, it begs the question of whether they are ready for the extra financial responsibilities associated with homeownership. But for many people, automated savings offers the extra push they need to reach their financial goals.

In some families, adult kids living at home might contribute a token amount of money towards household expenses or they might contribute in other ways such as cooking or cleaning the house in exchange for lodging. The father quoted on The Province mentions that as empty nesters they enjoy their freedom. Having extra help around the house might help offset the loss of freedom or privacy and create a win-win for kids and parents.

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