As parents, we’re taught by our parents – and we teach our children – about two main objectives in life: 1) get an education in order to earn a good income and, 2) buy a home to build financial security. However, both of these are becoming out of reach. Young parents today face a very difficult decision as to how to plan for their children’s future. Parents want to do everything they can to help their kids, like save for their education and help them buy a house. But what does that look like in this day and age?
The Cost of Education & Housing in Canada
If it’s within their means, most parents want to help their kids with education costs and help them get settled so they will be able to buy their first home. Unfortunately, one of those – buying a house – is already out of reach for many today. And it will likely be out of reach for many of their children as well.
In 2020, Canadian parents gave their kids a total of $10 Billion to buy their first home. The majority of that money came from retirement savings or borrowing against their home. Unfortunately, this means that at the time these parents got out of debt, they were forced to take on more debt to help their kids buy a house.
The average price of a house in Canada in 2022 was $704,000. In Ontario, as of February 2023, it was $865,279. That means the average person needs to save 20% for the downpayment to buy a house. To put that into perspective, that’s between $140,000 and $170,000.
As for education, a four-year university education costs, on average, $48,074 for students who live at home. It’s $96,004 if they live in residence or their own apartment (based on data from StatsCanada). Students today do have a variety of financial support programs, the most notable being the student grant program. Depending on family income, students can receive between $3,000 and $6,000 in student grants per year to help fund their education. However, in terms of the total cost of education, this doesn’t go very far.
Saving for a House
Let’s consider how your child might save for the downpayment on their first house. The higher the downpayment, the lower the income needed to qualify for a mortgage. Therefore, if your child can only save enough for a 10% downpayment, they’ll need a higher income to qualify for the mortgage.
Yet, saving a 20% downpayment is quite impractical when you look at the numbers. According to the report Straddling The Gap, in 1976, full-time earners took about 5 years to save 20% for a downpayment. Today, it would take 17 years to save that 20% downpayment.
Those who dream of owning a home in the GTA will need to save for up to 27 years to make the same downpayment on an average-priced home. That’s 10 years longer compared to the average amount of time across Canada.
Average annual incomes have remained at around $50,000 in the region. StatsCan revealed that 25 to 34-year-olds in the GTA made an average of $51,600 in 2020. Meanwhile, the average price of a home in the region has soared to $1.1 million. According to the report, prices must drop by over $750,000 for 25-34-year-olds to afford a mortgage that covers 80% of the home’s value at current interest rates. Or the average full-time income would need to increase to $172,000/year, which is more than triple the current rates.
A Better Way to Save
When it comes to saving for a 4-year post-secondary education, your child(ren) would need to work hard and save every penny throughout high school and post-secondary. As for buying a house, it’s just not practical for most young people – especially if they spend 4 years paying for their education.
As parents, our choices are clear: save for your child’s future while they’re young or give them your life savings to help them start their life as you’re retiring.
It’s obviously better to start saving for them while they’re young – as young as possible. In terms of saving, you have a couple of options. You can open an RESP which is for education purposes only. As the parent, you’ll get $7,200 in a CESG matching grant over 17 years from the government for your $36,000 deposit.
Or, you can open a Child Plan participating whole life plan. This gives your child a tax-free annual dividend for life. For as little as $250 a month, they will have $148,000 in cash value in the end. They can use this for whatever they need – for education, to buy their first home, to start a business, etc.
The best part is by year 20 the plan is completely funded for life and it’s completely tax-free. The annual dividend they receive is tax-free for life, the cash value is guaranteed, and it compounds tax-free. Plus, you can transfer it tax-free to them anytime after they turn 18. They can even access the cash value tax-free as well.
The best way to help your children is to start now, with a Child Plan.