With the housing market being so hot, a certain bank has been in the news a lot for their very strange and risky lending practices. I’m referring to BOMAD, the “Bank of Mom and Dad”. How big a deal is this? The numbers tell a lot. CIBC says average down payment gifts to new buyers have increased 58% over the last two years. BMO reports seeing gifts up to $200,000. With first-time buyers representing over 50% of all new sales in Canada, BOMAD is a primary contributor to current inflation in the real estate market.
A lot of parents feel they need to, and want to, help their kids out financially. This is totally normal. The hard truth is that they also need to seek out practical advice – financial, personal and legal, to avoid misunderstandings, miscommunication, and even potential legal consequences. Mom and Dad need someone to ask them good questions.
Learning about the Bank of Mom and Dad
Let’s get real about loaning money to your kids and borrowing money from your parents.
The current hot housing market and its rapidly rising prices have brought fresh attention to the desire and need for parents to help their children get into the housing market. For some folks, becoming a client at the Bank of Mom and Dad (“BOMAD”) is perceived as a necessity. The truth is, parents and grandparents providing money to children to help them buy houses is not a new phenomenon. It’s a natural by-product of one of the closest human relationships we have, and an intra-familial method of upward social and financial mobility.
While the BOMAD is natural, advantageous and desirable for many families, the circumstances surrounding money, family, expectations, gain and loss are some of the most risky to a family’s balance, and balance sheet. Successful BOMAD relationships are purposeful and intentional. This means all family members are making informed choices that are in line with a common objective. This shared understanding needs to be documented and clearly communicated to everyone involved.
There are many nuances to BOMAD relationships. Here are just a few of the big questions that need to be considered:
- Is this a loan or a gift?
- Is there interest on the loan? When will it be paid back?
- What does this mean for the other kids in the family? What are their expectations?
- What are the legal effects of the loan for the child’s intimate relationships? (Family Law stuff)
- Will Mom and Dad need to go on title to a home? What about the tax exposure?
Like all purposeful planning, it takes courage to talk about these subjects. Talking about money among family members is uncomfortable for many people. However, it is necessary and advantageous to make sure there is a purpose behind the plan and that everyone knows the whole story.
Family helping family is natural and desirable. Being prepared and setting a family up for success through deliberate communication may feel less natural, but it helps avoid unmet expectations, misunderstandings and hard feelings that accompany ill-planning.
Brown Lawyers is here to help BOMAD branches. If you know someone who is planning to loan money to a child, suggest that they do it thoughtfully and with purpose by getting in touch with us first.
