Co-signing a Mortgage Loan in Canada
Table of contents
Sometimes, you may lack the necessary income or credit score to qualify for a mortgage to buy a home. Typically, individuals turn to their financially stable parents or relatives for assistance. However, a new trend has emerged where friends or a group of friends come together to pool their resources to make purchasing a home more affordable. By co-signing a mortgage, you legally agree to repay the loan if the other borrower(s) cannot. A decision that can have various implications on your financial standing, both positive and negative.
Canadians must consider the potential risks of co-signing a mortgage with a friend or family member. If your co-signer’s financial situation changes unexpectedly, you could be obligated to pay their share of the mortgage payments, property taxes, homeowner’s insurance, and utility bills – including any co-ownership or strata/condo fees. This added financial burden could impact your credit score and overall financial stability. Therefore, before agreeing to co-sign or become a guarantor on a mortgage, it is crucial to thoroughly assess the risks and benefits involved in the ownership structure you choose and understand the obligations of your choice.
Key Takeaways
- A co-signer is not only a co-borrower but also on the subject property’s title
- A guarantor is a co-borrower without any ownership rights in the subject property
- Being a co-signer or a guarantor affects your ability to qualify for other credit.
What is Co-signing a Mortgage?
Acting as a co-signer for a mortgage is comparable to being a financial supporter. By co-signing, you are vouching for the primary borrower’s financial reliability. This implies that you share equal responsibility for making the mortgage payments, regardless of whether you reside in the property or contribute to the monthly installments. Interestingly, in 2024, approximately 31% of first-time homebuyers in Canada received financial assistance from their family members, often through co-signing arrangements.
The co-signing arrangement you opt for can impact your obligations if one of the borrowers passes away or decides to terminate the agreement. Being a co-signer can have long-term financial implications, so it is essential to consider the decision carefully and seek professional legal advice.
Mortgage Co-signer vs. Mortgage Guarantor
In Canada, the terms co-signer and guarantor are frequently used interchangeably, but they have distinct differences. A co-signer is equally responsible for the mortgage and also goes on the property’s title, sharing the same level of financial obligation and ownership as the primary borrower. A guarantor is only held responsible if the primary borrower defaults on the mortgage.
However, if you want to help your children or sibling pass a mortgage stress test to qualify, the lender may require you to go on title as a co-signer instead of simply going on the mortgage as a guarantor. The lender may request this if, say, the majority of the income, gifted downpayment, or net worth on the application is due to the parent or sibling going on the application as the co-borrower.
Being added to someone else’s property title means you might need to refinance to be removed later. However, it also safeguards your investment, allowing you to use your contribution to assist another family member in the future after being removed from the title through a sale or refinance.
Acting as a guarantor for your children’s mortgage can impact your ability to qualify for financing for your car or home refinance. On the positive side, when the mortgage is up for renewal, and the other party can qualify without you, they do not need to refinance since you’re only a guarantor on the mortgage, not a co-signer on the property’s title.
Understanding the implications of being a co-signer versus a guarantor regarding mortgages is essential. If you want to help someone secure a mortgage and limit your risk, consider being a guarantor instead of a co-signer. This way, you can provide support without taking on the same level of financial responsibility as a co-signer.
Tenancy Ownership Structures
Two ownership structures are available when adding a co-borrower or purchasing a home with friends or family.
Joint Tenancy
In joint tenants-with-right-of-survivorship (JTWROS), each co-owner has an equal share and responsibility in the property. This means that every co-owner must agree before changes, like renovations, selling the home, or refinancing, can happen. If one co-owner dies, their share automatically goes to the remaining co-owners. Joint tenancy is an excellent choice to ensure that the property goes to the surviving co-owners when someone passes away or if you have confidence in your co-owners to make decisions for you if you cannot.
Tenancy in Common
In joint tenants-in-common (JTIC), each co-owner holds a specific portion of the property, typically determined by their financial input. If there is no will, each co-owner’s share becomes part of their estate and will be inherited by their heir or next of kin, even if not explicitly mentioned in a will. This arrangement benefits those who wish to control who inherits their share of the property upon their passing.
With tenancy in common, owners can sell or transfer their shares without needing approval from other co-owners. For this reason, mortgages or ownership set up as JTIC are limited to standard charge versus collateral charge mortgages. Additionally, they can sell their portion to another co-owner through a deed of trust. It’s important to note that while tenancy in common offers more security in terms of responsibilities, it may limit access to collateral charge mortgages, as these typically require joint ownership of the property title.
We’re curious…
Benefits of Co-signing a Mortgage
Co-signing can be a powerful tool for helping loved ones achieve their homeownership dreams. Here are some key benefits:
Increased Buying Power: With a co-signer income and assets factored in, the borrower(s) may find it easier to qualify for or obtain a larger mortgage.
Better Interest Rates: A co-signer with a strong credit score can help avoid unfavourably higher interest rates for someone lacking a good credit score.
Building Credit: Successfully managing a mortgage can significantly boost the primary borrower’s credit score.
Legal Responsibilities and Financial Implications
Before you sign on that dotted line, it’s crucial to understand the weight of your commitment. As a co-signer or guarantor, you’re not just a cheerleader but a full-fledged team player in the mortgagor’s obligations.
Equal Responsibility: In the eyes of the lender, you’re just as responsible for the mortgage as the primary borrower. If they can’t make payments, it’s on you.
Credit Impact: Late payments or defaulting on your payment will affect your credit score as much as the primary borrower’s.
Debt-to-Income Ratio: The mortgage will be considered part of your debt load, which could affect your ability to secure other loans or credit. Co-signing a mortgage is a serious, long-term commitment. Ensure you’re prepared for the potential financial impact before agreeing to co-sign or guarantee someone else’s mortgage.
First-time homebuyer (FTHB) Qualification: Being on the title for a home as a co-owner could disqualify you from taking advantage of FTHB incentives, such as RRSP homebuyer plans and FTHB land transfer rebates in jurisdictions that allow them.
Eligibility Criteria for Co-signers and Guarantors
Not just anyone can be a co-signer. Canadian mortgage lenders and financial institutions who back them are typically looking for:
Strong Credit Score: Usually 680 or higher
Stable Income: Proof of consistent employment and income
Low Debt-to-Income Ratio: Typically below 35% for GDS and below 42% for TDS.
Canadian Residency: Most lenders require co-signers and guarantors to be Canadian residents and confirm taxes are not owed with the most recent year’s Notice of Assessment.
Pros and Cons of Co-signing or Guaranteeing a Mortgage
Pros:
- Help a loved one achieve homeownership
- Potentially secure better terms for your mortgage agreement
- Strengthen family bonds through financial support
Cons:
- Risk to your financial health
- Potential strain on relationships if payments are missed
- Limited ability to take on new debt yourself
Process for Co-signing or Guaranteeing a Mortgage
- Discussion and Agreement: Have an open, honest conversation about expectations and responsibilities.
- Financial Assessment: The primary borrower, co-signer, or guarantor undergoes credit checks and financial information scrutiny.
- Legal Review: Consider having a real estate lawyer’s independent legal advice if unsure about implications and obligations.
- Signing: If you’re approved for a mortgage, both parties sign the documents.
Removing a Co-signer from Your Mortgage
Life can change, and you might decide to remove a co-signer from your mortgage. This involves the primary borrower qualifying for the mortgage alone, refinancing the mortgage under their name only, and getting preapproval or approval from the lender to release the co-signer. Suppose you’re removing a spouse due to separation or relationship breakdown – your lender may allow you to complete a release of covenant without having to refinance or complete a spousal buyout, saving you from paying the penalty to break the current mortgage terms. Remember to understand the costs involved from your lender, as legal fees and expenses may be associated with this process.
Mortgages giving you a headache?
Take a breather and work with nesto experts to make it easy for you.
Frequently Asked Questions (FAQs) on Co-signing a Mortgage in Canada
What is co-signing a mortgage?
Co-signing a mortgage means legally agreeing to repay the loan if the primary borrower can’t. It’s like being a financial backer, sharing the responsibility for mortgage payments, property taxes, homeowner’s insurance, and utility bills.
What is the difference between a co-signer and a guarantor?
A co-signer shares equal responsibility for the mortgage and goes on the property’s title, having ownership rights. A guarantor is only responsible if the primary borrower defaults and doesn’t have ownership rights.
What are the benefits of co-signing a mortgage?
Co-signing can increase buying power, help secure better interest rates, and build the primary borrower’s credit score. It can make homeownership possible for your loved ones who might not qualify independently.
What are the risks of co-signing a mortgage?
As a co-signer, you’re fully responsible for the mortgage if the primary borrower can’t pay. This could strain your finances and hurt your credit score. It can also limit your ability to take on new debt.
Who can be a co-signer or guarantor?
Lenders typically look for co-signers with a strong credit score (usually 680 or higher), stable income, low debt-to-income ratio, and Canadian residency.
How can I remove myself as a co-signer from a mortgage?
Removing a co-signer usually requires the primary borrower to refinance the mortgage only in their name or with a co-applicant. This can involve legal costs and processes. In some cases, like a separation, lenders might allow a release of covenant, which removes one spouse from the mortgage charge without refinancing the mortgage.
What are the ownership structures for co-owning a property?
Two common structures are joint tenancy and tenancy in common. Joint tenancy means equal ownership and responsibility, with shares automatically transferring to the surviving co-owner(s) upon death. Tenancy in common allows for specified ownership shares and more individual control over the property, with shares passing on to each owner’s elected beneficiary upon death.
Should I co-sign a mortgage?
Co-signing is a big decision with long-term financial implications. Assess your financial situation, the borrower’s reliability, and your relationship with them. Consider seeking independent legal advice (ILA) to fully understand the risks and benefits.
Making the Right Decision
When considering co-signing or guaranteeing a mortgage loan in Canada, it’s essential to recognize the significant impact it can have on the parties involved. This decision should not be taken lightly, as it can significantly affect your financial stability and future. Before making a choice, it’s essential to carefully assess your financial situation, the strength of your relationship with the borrowers, and your long-term financial objectives. These factors will help you determine whether co-signing or guaranteeing a mortgage is the right choice for you.
Emphasizing the importance of open communication when contemplating co-signing or guaranteeing a mortgage is crucial. Establishing clear expectations and planning for potential scenarios, such as making payments on time, missed payments or changes in financial circumstances, is vital. This will ensure that both parties agree and can effectively handle any challenges.
Whether you’re considering co-signing or guaranteeing a mortgage for your friend or family member to become a first-time homebuyer (FTHB) or understanding how it can affect your long-term mortgage or financial strategy, our mortgage experts are here to help. Your mortgage needs are unique – your mortgage strategy should be, too. Contact nesto’s mortgage experts now to get started and find your best mortgage solution today.
Why Choose nesto
At nesto, our commission-free mortgage experts, certified in multiple provinces, provide exceptional advice and service that exceeds industry standards. Our mortgage experts are non-commissioned salaried employees who provide impartial guidance on mortgage options tailored to your needs and are evaluated based on client satisfaction and advice quality. nesto aims to transform the mortgage industry by providing honest advice and competitive rates using a 100% fully digital, transparent, seamless process.
nesto is on a mission to offer a positive, empowering and transparent property financing experience – simplified from start to finish.
Contact our licensed and knowledgeable mortgage experts to find your best mortgage rate in Canada.
Ready to get started?
In just a few clicks, you can see our current rates. Then apply for your mortgage online in minutes!
