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Co-Borrower Mortgages

Dec 1

Mortgage with a Co-Borrower

Author: Chris Allard

Category: Mortgages & Rates

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 buy with a co-owner. But how does a mortgage with a co-borrower 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.

What is a Mortgage with a Co-Borrower?

A mortgage with a co-borrower 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. Every applicant is 100% responsible for the mortgage. This means if one borrower cannot contribute their share of the payment, the other borrower(s) are responsible for ensuring the totality of the mortgage payment is made.

For this reason, it’s crucial that you only enter into this arrangement with individuals you fully trust. 

Types of Mortgage with a Co-Borrower

In Canada, there are two types of mortgage with a co-borrower: 

  • 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 is fully responsible for the entire mortgage payment. If a co-owner passes away, the home’s share will be passed to their estate.

How to Get a Mortgage with a Co-Borrower in Canada

To qualify for a mortgage with a co-borrower 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
  • Assets

It’s important to note that if one individual has bad credit or hefty debts, this can make the mortgage rate more expensive or potentially result in a declined application. 

Credit Scores

While the collective income of co-borrowers can enhance mortgage eligibility, it’s important to note that lenders will also consider individual credit scores. If one co-borrower has a significantly lower credit score, it may impact the overall interest rate and terms of the mortgage. Should their creditworthiness be considered too weak, the entirety of the loan application will be declined. Understanding the influence of credit scores on the mortgage application process is essential for co-borrowers to make informed decisions.

Financial Planning

Successful mortgages with co-borrowers often hinge on effective financial planning. Before applying for a joint mortgage, co-borrowers should sit down together and discuss their individual financial situations, long-term goals, and potential challenges. This open dialogue can help mitigate future disagreements and ensure everyone is on the same page regarding financial commitments and expectations.

The Importance of Legal Agreements

When entering into a mortgage with a co-borrower, it’s crucial to establish a comprehensive legal agreement outlining the responsibilities and rights of each party involved. This agreement should cover not only the financial aspects but also address potential scenarios such as the sale of the property, changes in ownership, or what happens in the event of a dispute. Seeking legal advice to draft a clear and enforceable agreement can provide peace of mind for all co-borrowers.

Flexibility in Co-Borrower Arrangements

Flexibility is key in mortgages with a co-borrower, especially considering life’s unpredictable nature. The legal agreement should include provisions for changes in circumstances, such as job loss, marriage, or other life events that may impact financial contributions. Having a plan for such scenarios can prevent unnecessary stress and ensure the sustainability of the co-borrower arrangement.

Tax Implications

Mortgages with a co-borrower can have tax implications that individuals should be aware of. The distribution of tax benefits and liabilities should be clearly outlined in the legal agreement. For example, deductions related to mortgage interest may vary based on the ownership structure. Seeking advice from a tax professional can help co-borrowers optimize their financial positions and comply with tax regulations.

Advantages of Getting a Mortgage with a Co-Borrower 

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.

Shared Expenses

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 Having a Mortgage with a Co-Borrower 

While a mortgage with a co-borrower 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.

Qualification for Another Mortgage Loan

An additional disadvantage of co-borrowing is that it can hinder one applicant’s ability to qualify for another mortgage loan. The existing loan counts as a financial obligation, increasing their debt-to-income ratio and potentially lowering their creditworthiness. This can significantly impact their eligibility and terms for any new mortgage applications.

Interpersonal Issues

The topic of money and finance can often stir up complications for relationships, even if you enter into this type of 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.

Selling

While a mortgage with a co-borrower holds every individual responsible for repayment, one of the parties may eventually want to sell their share of the property. If this happens, the mortgage lender would have to agree to change the borrowers and potentially the terms. This would require a standard qualification process.

Consider a Legal Agreement

Before going forward with a co-borrower mortgage, drafting a legal agreement should be strongly considered. This will clearly outline the responsibilities, rights, and obligations of each co-borrower, helping prevent misunderstandings and providing a framework for resolving any disputes that may arise. 

Ideally, the agreement will define roles and responsibilities and outline the delegation of details like payment schedules. It should also include default provisions to outline the consequences if one party cannot fulfill their financial obligations, covering the impact on the co-borrower’s credit score and potential legal repercussions. 

While drafting this document, incorporating a process for resolving disagreements, whether through mediation, arbitration, or legal action, is highly recommended.

Alternatives to Mortgage with a Co-Borrower 

After you’ve weighed the pros and cons of having a mortgage with a co-borrower in Canada, and 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.
  • Guarantor: 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 be your guarantor. 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. They will not appear on the title of the home nor assume ownership.

Exploring Mortgage Insurance Options

Given the shared responsibility of a mortgage with a co-borrower, exploring mortgage insurance options becomes paramount. Mortgage life insurance or disability insurance can provide added protection for co-borrowers, ensuring that the mortgage is covered in the event of unforeseen circumstances. Understanding the different insurance options available and their implications is vital for making informed decisions.

Protecting Co-Borrowers: Mortgage Insurance Products

Optional mortgage insurance products are designed to safeguard lenders and borrowers. These products ensure that mortgage payments are covered in the event of unforeseen circumstances. This insurance policy can be a vital safety net, providing peace of mind to all parties involved in the mortgage.

If a co-borrower is unable to work, or if they pass away, mortgage protection insurance can cover the remaining mortgage balance or the monthly payments, depending on the policy terms. This financial support helps prevent the surviving co-borrower from facing the burden of repaying the loan alone. Unlike traditional life insurance, mortgage life insurance specifically targets the mortgage debt, ensuring that the home remains secure.

Factors to Consider Before Choosing a Co-Borrower

Financial Stability

Financial stability is crucial as it determines the ability of the co-borrower to consistently contribute to loan repayments. Lenders evaluate the combined financial health of both borrowers to decide on loan approval and terms. 

  1. Consider the co-borrower’s income, ensuring they have a reliable and sufficient source from regular employment or a stable business. 
  2. Assess their current debt levels; high existing debt may strain their ability to contribute to new loan payments. 
  3. A healthy savings account is also important, as it acts as a buffer during financial difficulties, ensuring loan repayments continue smoothly. 
  4. Lastly, review their monthly expenses and overall financial obligations to ensure they can manage additional loan payments without financial strain.

Exit Strategy

An exit strategy is important in case one co-borrower needs or wants to exit the loan agreement before it is fully repaid. This ensures the loan can continue to be serviced without financial distress or legal issues. The exit strategy should include a buyout option, defining a process for one co-borrower to buy out the other’s share of the loan if necessary. Outline the possibility of refinancing the loan under a single borrower’s name if one party exits the agreement.

Long-Term Plans

Aligning long-term financial plans ensures that both co-borrowers are working towards common goals and are prepared for future changes that may affect their ability to repay the loan. Discuss and align your financial goals, such as home ownership, retirement savings, or investments, as misalignment can lead to conflicts. 

Also, consider potential life changes, including marriage, children, career changes, or relocations, and how these might impact loan repayment. If the loan is for an investment, like property or business, ensure both parties agree on the investment horizon and exit strategy.

Building and Maintaining Trust in Co-Borrower Relationships

Trust is the foundation of successful co-borrower relationships. Regular communication, transparency about financial matters, and a commitment to shared goals contribute to a healthy co-ownership dynamic. Co-borrowers should proactively address any concerns, discuss financial milestones, and foster an environment of mutual respect to ensure the longevity and success of their shared homeownership journey.

Is a Mortgage with a Co-Borrower Right for You?

A mortgage with a co-borrower 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.

Professional Guidance

Navigating the complexities of having a mortgage with a co-borrower can be challenging, especially for first-time homebuyers. Seeking guidance from mortgage professionals, such as the Chris Allard Mortgage Team, can provide valuable insights and personalized advice. Mortgage specialists can assess individual financial situations, guide co-borrowers through the application process, and help them make informed decisions aligned with their unique circumstances.

If you’re unsure about having a mortgage with a co-borrower, speak to our team today! Homeownership is an exciting journey, so we want to ensure you get the right advice with the best mortgage solutions possible.

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