Rich clients should pay off their children’s mortgages, says CIBC tax and estate planner Jamie Golombek.
“It doesn’t make sense that mom and dad have lots of money but [the bank] is loaning money to the kids,” Golombek told advisors gathered at a Million Dollar Round Table conference in Toronto June 11.
“These simple things are often overlooked,” he says.
Low interest rates on fixed-income products do little for wealthy clients’ bottom lines. But their children are likely committed to a mortgage that charges at least 3% or 3.5% interest.
So he asks clients, “Why don’t you simply pay off all the kids’ mortgages?”
Some clients balk at the idea, he says. They say their children should learn the discipline that comes with making monthly mortgage payments.
In that case, Golombek suggests a mortgage between his clients and their children. The first step is for the parents to pay off a child’s bank mortgage. Then the family should have a lawyer draft a mortgage of the same value between the two generations.
To ensure the child honours the agreement, Golombek says the agreement should penalize children if they default. But he recommends against charging interest.
“In Canada, the interest you pay on a mortgage is not tax-deductible,” he notes, adding the parents would have to pay tax on the interest they receive.
He says the advice may cost the advisor commissions in the short term, but it builds your client relationships.
“At the end of the day, you’re going to be rewarded,” he says. “You’re providing the best advice, and it may not get you and the bank the most money right away, but it’s the right thing.”