The decision to buy a home and get a mortgage can look different for everyone. If you want to own a house with friends or family, one way to share the financial load of homeownership is to apply for a co-owner mortgage. But how does a co-borrower mortgage work? Let’s explore everything you need to know, including how to qualify and how to tell if it’s the right choice for you.
Table of Contents
- 1 What is a Co-Borrower Mortgage?
- 2 Advantages of a Co-Borrower Mortgage
- 3 Disadvantages of a Co-Borrower Mortgage
- 4 Co-Borrower Mortgage Alternatives
- 5 Is a Co-Borrower Mortgage Right for You?
What is a Co-Borrower Mortgage?
A co-borrower mortgage in Canada is a type of mortgage that allows two or more individuals to apply for a loan together when purchasing a property. It holds all parties responsible for repayment. Generally, if one individual cannot make their share of the payment, the responsibility for the entire amount will fall on the co-owners. For this reason, it’s crucial that you only enter into this arrangement if you fully trust your co-borrowers.
Types of Co-Borrower Mortgages
There are two types of co-borrower mortgages in Canada:
- Joint Tenancy: All individuals have an equal share of the property and are equally responsible for paying the loan. If one of the parties moves out or passes away, the ownership and mortgage share are transferred to the remaining owners.
- Tenants in Common: Each individual has a specified share of the property and is only responsible for repaying the mortgage respective to that share. For example, if a person owns 30% of the property, they must pay 30% of the mortgage. If you decide to move, you can sell your ownership claim to another person. Otherwise, the entire property may need to be sold. If a co-owner passes away, the home’s share will be passed to their heirs.
How to Get a Co-Borrower Mortgage in Canada
To qualify for a co-borrower mortgage in Canada, all parties must meet the lender’s requirements. Each person must apply with details like:
- Credit score
- Employment history
- Proof of stable income
- Current debts
It’s important to note that if one individual has bad credit or hefty debts, this can make the mortgage rate more expensive.
Advantages of a Co-Borrower Mortgage
There are many benefits to getting a co-owner mortgage, especially with Canada’s rising cost of living and housing prices.
Larger Down Payment
Since you and your co-borrowers can combine your incomes, you can make a larger down payment. There are two advantages to making a larger down payment: avoiding mortgage default insurance and qualifying for a better rate.
The minimum down payment in Canada is 5% (up to $500,000) of the property’s purchase price. However, anything less than 20% means you’re legally required to get mortgage default insurance. The lower your down payment, the higher your premiums are likely to be.
Additionally, paying more upfront can reduce your monthly mortgage payments and decrease the life of the loan, which means you’ll accumulate less interest over time.
Qualify for a Larger Mortgage Amount
Another benefit of combining your income is that you may qualify for a more significant loan amount, giving you more freedom to purchase a larger house or move to a wealthier neighbourhood with all your desired amenities.
Co-owning a home helps release financial burdens beyond the mortgage. For example, you can divide household expenses like utilities, property taxes, maintenance and repairs among all owners. This is especially useful if you want to quickly add value to your home because there’s more money to put into renovations and updates.
Disadvantages of a Co-Borrower Mortgage
While a co-owner mortgage comes with many desirable advantages, there are some drawbacks to keep in mind:
Dependency on Each Other
Entering this type of mortgage agreement means you need to depend on your co-borrowers to make their share of the payments. If one person cannot take on this responsibility, the rest of the loan will be your burden to carry. Furthermore, if one fails to pay, this will impact everyone’s credit scores.
The topic of money and finance can often stir up complications for relationships, even if you enter into a co-borrower mortgage with someone you trust and love. When two or more people own a home and are held responsible for repaying a loan, there’s a chance that arguments may arise. You may disagree over repayment strategies, dividing household tasks, and other expense-related concerns.
While a co-borrower mortgage holds every individual responsible for repayment, one of the parties may eventually want to sell their share of the property. If this happens, they can sell their claim to a different individual or request a forced sale of the entire property. Both outcomes can be undesirable, especially if you and this person are on bad terms.
Co-Borrower Mortgage Alternatives
After you’ve weighed the pros and cons of a co-borrower mortgage in Canada, if you decide it’s not for you, there are other alternatives to consider:
- Borrow on your own: This may require you to buy a cheaper home within your budget or wait until you save more for a larger down payment.
- Co-signing: If you don’t meet the requirements for mortgage qualification with your credit history, income, and debt information, you can get someone you trust to co-sign. This means they’ll be liable to take on the entire loan if you fail to make regular payments, which provides extra reassurance to lenders. However, the arrangement will not require the co-signer to contribute to your down payment amount, monthly fees, or household expenses like maintenance and repairs.
Is a Co-Borrower Mortgage Right for You?
A co-borrower mortgage in Canada can be an excellent option for those who want to purchase a property together and want to share some of the financial responsibility of homeownership. This type of loan can be perfect if you have reliable and trustworthy co-owners by your side. However, it may not be for everyone, especially if you or someone else is unsure if they can carry their load or if you don’t want homeownership to be defined by depending on others.
If you’re unsure if this type of mortgage is right for you, speak to the Chris Allard Mortgage Team! Homeownership is an exciting journey, so we want to ensure you get the right advice with the best mortgage solutions possible.
Chris Allard’s experience in the field means he can get you offers with over 50 financial institutions lending in Ottawa. Every lender has many mortgage products they offer, which means Chris and his team will make sure a mortgage caters to your needs while also ensuring you get a competitive rate. Chris Allard is a proud mortgage broker of Smart Debt Mortgages, independently owned and operated. Smart Debt broker #12236.