The Bank of Mom and Dad: confessions of a propped up generation

Last spring, when Erica’s parents came to visit from Alberta, Erica and Gavin took them around to see a few houses. That’s when Erica’s father, a semi-retired lawyer who is financially comfortable but far from rich, pulled her aside and offered to triple their down payment. The young couple ended up putting $300,000 down on a $661,000 house near St. Clair and Dufferin, which left them with manageable monthly payments.

Erica and Gavin refer to the money as an investment. But for all intents and purposes, it’s a gift—a gift with substantial benefits. Without it, they wouldn’t be considering sending their daughter to private school or eating out whenever they want. Without it, they would either be house poor or living in a neighbourhood they didn’t much like.

Grateful as they are, they avoid talking about how their lifestyle is supported by Erica’s parents. Her three siblings don’t know about it and neither do her in-laws. “They would be hurt if they knew how much my dad was able to put in compared to the amount they put toward Gavin’s condo,” Erica says. She and Gavin don’t want to think about what would happen if her father died tomorrow. (“Would my siblings inherit a portion of my house? That would be awkward.”) When her parents recently visited the new house, she and Gavin expressed their thanks and told them, “This is your house too.”

Erica and Gavin try to be more frugal, not less, because of her parents’ help. She wouldn’t feel comfortable driving a fancy car or going on lavish vacations because her parents might notice and think, “Gee, I guess they could have paid the higher mortgage payments after all.” They’re also careful about what they reveal to friends, many of whom seem to have more decadent lifestyles than they do. “I’m grateful,” she says. “I feel like this money has allowed us to finally catch up.”

Over many years of living and working in Toronto, I have known few friends or colleagues who managed to get on the property ladder without help from someone in their family—usually a parent. And for some, the funding continues beyond that. I had a girlfriend who received a monthly stipend from her parents (she wouldn’t tell me how much, but judging by her lifestyle it had to be substantial), and a boyfriend who received regular family cash infusions. I know a married couple who had the child-care costs for their three kids paid for by the wife’s mother. These aren’t people with large trust funds who will inherit millions—that’s not what I’m talking about here. This is about money that middle-class Toronto families give their adult children just so they can get by in a regular-seeming way.

My father helped me over a decade ago by making me a $15,000 loan. I bought a little Victorian row house near Trinity Bellwoods Park that appreciated very nicely before I sold it five years later. In the end I was able to pay back my dad, but without his help I wouldn’t be a homeowner at all.

The “velvet handshake”—an early inheritance from a relative before said relative dies—was once only common in wealthy circles. Now it’s the secret force powering the city’s middle-class downtown economy. Millions of dollars are being transferred within families, usually between living generations, in order to prevent adult children from going into a dangerous amount of debt as they enter the housing market and struggle to pay for their own kids’ nannies, summer camps, piano lessons and iPhone bills.

While the rising economic tide of the post-war boom meant that young Toronto professionals in the ’60s, ’70s, ’80s and ’90s could reasonably be expected to buy property on their own, today circumstances have changed. The Cities Centre at the University of Toronto found that the income gap in Toronto has increased by 46 per cent since the 1980s. A good degree and a decent job will no longer automatically entitle you to the financial breathing space to save up a down payment. Most economists agree that the middle class has been hit hard in recent years by real estate prices that are climbing much faster than average incomes. For many couples, a withdrawal from the bank of Mom and Dad is the only solution.

The thing about the bank of Mom and Dad is that once you’ve made one withdrawal, you’ll likely return for another. Many couples I spoke to for this story had tales of unexpected crises that would have bankrupted them without an assist from their parents. And these are people who are well into their prime earning years—people who, in any other decade, would be paying off their mortgages and building their RRSPs.

One couple I’ll call Amy and James are not the sort of people who come to mind when you think of family money. Both in their mid-40s, they have two children, aged five and seven, who attend public school. They live in a narrow, well-maintained three-bedroom semi on a west-end street where some of the old-world residents still make sausages in their backyards. James, who is the major breadwinner, works at a mid-size marketing firm, while Amy, a former public sector worker, is now a stay-at-home mom who takes on occasional freelance work. Together, they earn a low six-figure income and are, as Amy describes it, “not big spenders at all.” They have a single, slightly battered family car and have not been away on a holiday, aside from taking the kids to Amy’s parents’ place in Florida, in over three years. They are modest, even frugal—they have a monthly household budget and stick to it.

But Amy and James have a secret that sets them apart financially from almost all their friends and colleagues in downtown Toronto, especially those with kids. They’re completely debt free. “We feel kind of bad about it, so we don’t tell anyone,” Amy confesses. They’re the lucky beneficiaries of Amy’s father’s largesse. He’s a now-retired corporate lawyer in his 70s who worked hard, invested well and lived to reap the rewards of the late 20th century’s extraordinary period of sustained economic growth.

When Amy and James got together over a decade ago, her dad contributed to their down payment. He had done the same for Amy’s two older brothers. “I don’t know how much he gave them,” she says, “because we’ve never talked about it.” Later on, when Amy and James had babies and incurred child-care expenses, her dad gave them another chunk of cash. “It was just to get us over the hump.”

And then, while the city was still in the depths of recession, Amy and James lost their jobs within three months of each other. For the first time in their adult lives, they were scared. How would they pay their $2,000 monthly mortgage once James’s modest severance package ran out? Would they have to pull their youngest child out of daycare? One night, as all these questions were swimming through Amy’s mind, her dad called her up and offered to pay off her mortgage. “You’re never going to need it more than you need it now,” he said. Amy had to admit he was right. Within a month, they paid off the house. All told, they have received $200,000 from Amy’s dad.

A couple of years on, they’re doing well. Amy’s new freelance business, which struggled in the first year, is now making a small profit. James got a new job that came with a big promotion and pay raise. “When I think about what my dad gave us, I feel incredibly lucky because it’s partly why we’re so happy as a family. It’s been a massive load off our minds. It’s made everything feel much more…” she pauses to search for the right word, “not rich, just normal. This is what it takes in Toronto just to get to the middle ground.”

While Amy and James are now in a secure position because of their access to family money, it could have gone the other way entirely. “We were in our 30s when we met, and neither of us had any equity,” says Amy. “I was coming out of my third university degree and not making much. We would never have been able to buy without that initial help.”

After watching my Gen X friends (and the millennials who followed us) struggle in Toronto’s job and housing markets, I came to believe that affluent baby boomers have a moral obligation to help their kids. They lived through so many years of prosperity and were able to buy houses cheap, pay them off and watch them appreciate wildly, take annual tropical vacations, join country clubs and drive German sedans. They should help their children who flail in the economic tailwinds of the early 21st century economy.

There are at least two serious repercussions to this scenario. First, parental money artificially props up the economy, especially the housing market. John Pasalis, a Toronto real estate broker and owner of the firm Realosophy, has noticed the impact of family funds on the local market. Family money is, at least in part, the reason why the city has seen such an extraordinary real estate boom in the past decade. He estimates it has raised the number of first-time buyers in the Toronto market by 25 to 30 per cent. It’s a vicious circle: rising house prices have spurred a growing number of parents to help their adult children get into the property market, which in turn causes house prices to rise even further.

Second, some middle-class boomers, feeling flush with the value of their real estate, cash in a few bonds or take out a loan as leverage for their offspring, leaving them vulnerable to debt right on the verge of retirement. New buyers are now entering the market with outstanding loans both to the actual bank and the bank of Mom and Dad. The help they receive now to buy their high-priced real estate is money they will not be receiving as an inheritance later on—which means if property values fall and the pension funds dry up, we are a generation without a retirement plan.

Kathryn Kotris, a Toronto mortgage broker, told me that in recent years she’s seen a sharp rise in older parents taking out new or second mortgages against their homes in order to free up cash for their children’s first down payments. Sometimes the parents take out the loan and the kids simply pay it back themselves. Part of the reason for the shift is the CMHC’s recent decision to reduce the maximum amortization period from 30 years to 25, thus raising both minimum down payments and monthly mortgage payments for new buyers. “For young families living in Toronto it’s been prohibitive,” she says. “These people are trying to buy their first homes and have daycare costs of $1,000-plus a month per kid. Their parents want to see their kids building equity.”

I know one boomer who has happily gone into debt to help out his adult children. David is a retired veterinary epidemiologist. He’s given his daughter, Rebecca, a 35-year-old physician, and son, Matthew, a 37-year-old stay-at-home dad, cash gifts toward house down payments. In all, since his kids have graduated from school, he’s handed over roughly $300,000. He took out a line of credit against his house to do so. While many financial experts would caution boomers against taking on more debt late in their lives, David says it was an easy choice. “My children are growing up in a situation that is very different from mine. My reasoning was, ‘What’s the money for anyway?’ I’m not interested in remodelling the house. I want my kids to have the security I did.”

It’s a generous sentiment, but not one that Rob Carrick entirely agrees with. The business journalist and author of How Not to Move Back in With Your Parents has dedicated his career to advising boomers on the best ways to help out their adult children financially, and going into debt is not one of them. “Baby boomers actualized themselves through property, and they’re bound and determined that their kids will have the same thing,” he told me, “even though it’s no longer feasible.” The Americans learned a big lesson after the 2008 crash. In cities south of the border, where the subprime crisis turned millions of U.S. homeowners into renters virtually overnight, fewer young people are buying houses than ever before. Not so in Canada, where stricter lending standards protected the market. Here, we’re also propelled by a powerful conviction that buying property is the key to economic stability and success.

While older parents who are extending themselves to help their kids buy houses might think they’re doing something conservative and prudent, their generosity presents a threat to the economy as a whole. “Baby boomer affluence is undercut by record baby boomer debt levels,” says Carrick. “For many, home equity is not liquid money they can pass around. When their kids get in a pinch, they’ll say, ‘I’m used to borrowing, so I’ll just do that.’ But who’s to say whether they can pay it off?”

With the rising income gap, it’s understandable that people at the top are doing everything in their power to make sure their children inherit their privileges. While Toronto was once a city where you could make your fortune, it’s rapidly becoming a place where it’s necessary to have a leg up to get a foot in. The more unequal a society, the more you inherit your chances.

One girlfriend of mine who received a family cash infusion for a down payment on her first house over a decade ago told me she was open about it with her friends in order not to perpetuate a big lie. “You don’t want to project this ludicrous façade that a single woman in her 30s, even on a decent salary, can afford to buy her own house, because in Toronto that’s not true,” she said. And yet that’s exactly what we do when we fail to mention that parental money is in play: people with family help get to live the dream and people without get to feel like failures.

Megan MacQuarrie was just 21 when her grandfather, Barry Morse, a British actor then in his 70s, called her up from his home in London with good news. “Megan Louise,” he said in his West End drawl, “I’ve got a bit of an inheritance for you, and I’ve decided I want you to have it now rather than when I’m dead.” Morse, a one-time London theatre legend who later made his fortune playing the inspector on the original TV series of The Fugitive, wanted to watch his granddaughter enjoy the money he knew he wasn’t going to spend. The gift was $100,000. That’s not buy-superyacht-and-float-on-it money, but it’s hardly peanuts either. For MacQuarrie, the news came as a complete shock. She was pursuing an arts degree and bartending on Queen West, trying to figure out what to do with her life. “My first impulse, obviously, was to go to Morocco and smoke a ton of hash,” jokes the now-38-year-old. “But luckily I’d just hooked up with a responsible older guy who would later become my husband, and he urged me to buy a house instead. At the time it just seemed like my grandfather gave me a place to live, but I now realize what an extraordinary gift it actually was.”

MacQuarrie and her chef husband-to-be bought a ramshackle Parkdale row house for $110,000 the following year (yes, that’s what a house in Parkdale cost in 1998) and a couple of years after that upgraded to a bigger, renovated Victorian in Leslieville, which at the time, says MacQuarrie, “was basically junkieville. There were needles in my backyard every morning. Now it’s a high-end stroller derby.” A few years later, after they’d had their daughter, Olivia (now 10), the couple decided to start a business. They borrowed against their house and used the cash to open a shellfish restaurant in P.E.I., where they lived for several years before expanding to another location in Manhattan’s Lower East Side, all the while renting out the Toronto house.

Eventually, they sold the restaurants, returned to Toronto and moved back into the Leslieville house, where MacQuarrie used the restaurant proceeds to pay down their mortgage. It wasn’t long after that her father, a drama instructor, was diagnosed with leukemia. He sold his condo and put a down payment on a large semi at Coxwell and Queen. MacQuarrie and her husband rented out their house again and moved into the upstairs apartment of her father’s new house. She now cares for him while working and bringing up their daughter. As a family, they’re uncommonly open about money. “The deal is, we pay the mortgage and when Dad dies I get the house,” she says. Meanwhile, the place in Leslieville continues to provide the family with a tidy rental income. “It’s very multi-generational and old-fashioned in a way—we help each other out,” says MacQuarrie. “But looking back on it, everything I was able to do as an adult was made possible because of my grandfather’s gift.”

While it’s hard not to admire the generosity of the old and affluent passing on their assets to the young and struggling, the practice is inherently unsustainable. The boomers, who have benefitted from a one-off growth in real estate prices, are an anomaly in their land riches. Their children, earning comparatively smaller salaries in contrast to the rising cost of living, will not be in the same position to help their kids maintain a so-called “normal” lifestyle. Expectations are going to have to change.

If boomers deplete their retirement savings helping their kids buy houses and paying for child care, who’s going to take care of them when the money runs out? Similarly, will there be anything left for their grandkids to inherit now that so many of us are cashing in the family nest egg early? And don’t even contemplate a housing crash. If that happens, we’ll all be screwed.