Which is better? Gifting a down payment or leaving a larger inheritance?

In the long run, buying a house instead of renting a house generally works out better for most households and that is even after you fully discount the equity in your home.
    If you are financially secure, you may want to consider looking at the benefits and or drawbacks of gifting a down payment to your adult children, so that they can enter the housing market.
    In the long run, it will be very difficult to compound your investments quicker than the benefit of having your adult children enter the housing market.  By the time the mortgage is paid off, it is over six times better to gift a 5% down payment (with long term appreciation rate on the house at 1.5% annually) than to invest in a TFSA generating a 6% annual return.  The main advantage of gifting a down payment is the leverage on the down payment, which makes even a small annual return, into a big net benefit over time.
    It wasn't until we had a TFSA that we could illustrate the long-term benefits of gifting a down payment vs a larger inheritance.  Taking taxes out of the equation really simplifies the spreadsheet results.  One of the biggest surprises was that the dollar amount advantage never decreases to the enhanced inheritance despite the fact we ignored the savings from your adult children after they have paid off their mortgage in full.  The growth of the TFSA couldn't catch up to the equity growth in your child's home.


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Credit Card Nerd Math

Below we have a chart with the results of gifting a $12,500 (5%) down payment vs investing the $12,500 in a TFSA and having a larger estate for your adult children.
    Some of the assumptions we made were;
a 4% annual return on a TFSA;
a 6% annual return on a TFSA;
a 1.5% annual return on your child's home equity;
a 2% annual return on your child's home equity;



An Enhanced Inheritance vs Down Payment

Year

TFSA
(4% Return)

TFSA
(6% Return)

Home Equity
(1.5% Return)

Home Equity
(2% Return)

26

$34,517

$56,640

$366,705

$416,681

28

$37,334

$63,641

$377,788

$433,515

30

$40,380

$71,506

$389,207

$451,029

32

$43,675

$80,345

$400,971

$469,251

34

$47,239

$90,275

$413,090

$488,208

36

$51,094

$101,433

$425,576

$507,932

38

$55,283

$113,970

$438,439

$528,452

40

$59,773

$128,057

$451,691

$549,802



Value of $12,500 TFSA vs $12,500 Down Payment for your kids

Net Benefit Difference from Gifting a 5% down payment vs a larger inheritance

Year

Net Benefit Difference

26

$360,051

28

$369,874

30

$379,523

32

$388,906

34

$397,933

36

$406,499

38

$414,482

40

$421,745


Difference in value from a $12,500 TFSA gift to a $12,500 down payment


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Helping your adult children with their down payment on their first home can be a great way to increase the net benefit of a financial gift, but only if it won't hurt your financial health.
    In the long run, even if you discount the equity in your house to zero, you can come out better than if you rented your whole life, because your reduced housing costs later in life will more than make up for the initial investment and savings from the renter.  By gifting a down payment your adult child will be paying down the equity every month, annual cost of living increases will be reduced vs increasing rent rates and they will have a fully paid off house while they are still relatively young.
    Important Note: Every market, every house and every household is different.  What works for one family in Winnipeg might not work out for a different family in Calgary.  The above is for illustrations only and does not guarantee you that helping to buy a house for your child is the right decision for you.