A Smarter Gift: Why giving your child a mortgage may be better than giving them a house.

By Whittier Trust

As housing prices continue to climb in many of the nation’s hot real estate markets, many young families 

struggle to buy their first home, particularly in their parents’ more expensive neighborhoods. Wanting to keep their children close, parents with the financial resources to help, often consider gifting a home to their children. While this tactic can help keep kids nearby, providing a home can have significant tax and other associated implications. There is another option: giving your child a low-interest home loan.    

“The first thought of parents considering helping their children purchase a home is to gift money for a down payment and even to purchase the house outright,” says Dave Covell of Whittier Trust. “But providing a mortgage may actually be the smarter option, and better for both the parents’ and their kids’ financial future.” 
A loan between a parent and a child works similarly to a traditional mortgage. The transaction is thoroughly documented with all parties in agreement on the terms including regular payments. But rather than the funds coming from a bank or mortgage company, parents are providing the money which is then being paid back by their child.  

Providing a home loan for a child has several advantages over giving them a down payment or gifting them a home. First, a loan from a parent to a child can be structured with more flexible terms, such as a higher loan to value ratio and lower interest rate and payment. The flexibility allows the child to purchase a home that may otherwise be unaffordable. This not only allows them to purchase a house that fits within their budget, but also allows them to benefit from the appreciation of a property that may be worth considerably more than what they could have purchased on their own. The added appreciation could make a big difference to their net worth over the long-term. 

“I often see parents who want to help their kids buy a home because they want the grandkids nearby, or they just know their kids couldn’t afford it on their own,” says Dave. “A loan allows the parents to help, but because the loan is being paid back, it’s not a gift.”

A loan may also allow the child to move into a more expensive property or neighborhood while avoiding some of the tax implications that receiving a gift can trigger. The annual tax exclusion for a monetary gift from a parent to a child in 2018 is $15,000. With today’s housing prices, that often is not enough to close that gap between a child’s available resources and what’s needed to purchase a new home. Giving more than the $15,000 cap can result in tax liabilities for both the parents and the child. Loaning a child the money for a home can avoid these tax implications.

In addition to avoiding tax liabilities, giving your child a mortgage also protects the asset from future legal actions. If something unfortunate were to happen, such as if the couple that was receiving the loan were to get a divorce, the loan would need to be repaid. This can protect the parents from losing an asset they intended to benefit their child. 

Overall, providing a loan to help a child purchase a new house is a much smarter option than giving them the house as a gift. It offers a child the ability to get into a house that would otherwise be beyond their reach. They would be responsible for paying back the loan, but on terms that fit within their budget. From the parents’ perspective, the loan becomes part of their asset allocation and is protected from potential legal action.
In today’s market, where purchasing a first home can be a challenge for many, providing a home loan between a parent and a child can be a win-win option for everyone involved.

Disclaimer: $10 million marketable securities and/or liquid assets required. Investment and Wealth Management Services are provided by Whittier Trust Company and The Whittier Trust Company of Nevada, Inc. (referred to herein individually and collectively as “WTC”), state-chartered trust companies wholly owned by Whittier Holdings, Inc. (“WHI”), a closely held holding company. This document is provided for informational purposes only and is not intended, and should not be construed, as investment, tax or legal advice. Past performance is no guarantee of future results and no investment or financial planning strategy can guarantee profit or protection against losses. All names, characters, and incidents, except for certain incidental references, are fictitious. Any resemblance to real persons, living or dead, is entirely coincidental.

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