Given the high cost of homes in most major Canadian cities, a joint mortgage might seem like a great idea. Owning a home individually can in many cases be costly and even unwise. This is why so many consumers choose a joint mortgage in Canada.
As the name suggests, a joint mortgage (also known as a condominium loan) is when two or more potential homeowners pool their financial resources and apply for a mortgage together. This is a fairly common practice as it can be difficult to get approved for a single-income loan.
You can choose one of the following options:
- joint loan with relatives (for example, parents);
- joint ownership with a common-law spouse;
- joint deal with someone from your friends whom you trust.
When two or more substantial incomes, assets, and credit ratings are combined, mortgage lenders tend to believe more that it will be easier for you and your partner to make payments. As a result, anyone willing to take on responsibility can get a larger loan with better terms and conditions and better interest rates.
What Types of Joint Mortgage Can You Get?
Typically, co-owners can apply for two types of joint mortgages.
|Shared ownership mortgage
|Classic joint mortgage
|The most popular option, especially among spouses and civil partners.You and the other homebuyer will split your debt equally and therefore have equal property rights.You cannot sell, refinance, or renovate a home without the consent of the co-owner.In the event of the death of one of the buyers, all rights to the property, including the remaining mortgage payments, pass to the co-owner.
|More common among family members, friends, and business associates who co-finance the home.Allows co-owners to acquire different ownership shares.Unlike joint ownership, mortgages should not be divided equally. One buyer can invest more than another.In this scenario, ownership shares will not automatically be returned to other co-owners if one of the buyers dies.
Please note: you may be able to find a property with a more affordable cost to get a regular mortgage without the participation of co-owners.
If you are a co-owner of a classic mortgage and want to give up your share in the property, you can sign a trust agreement. This will allow you to sell your stake to one of the other buyers. Otherwise, the partner mortgage is accompanied by a trust sale agreement. This means that the entire property must be resold if the co-owner decides to sell or if they pass away without leaving an heir.
A Few Words About Credit Rating
This impact can be positive or negative, primarily because your respective credit history will be factored into the equation. If both of you have managed your money carefully and have developed the habit of making payments on time, the impact on your credit ratings can be positive. However, to do this, you both need to:
- pay all bills on time;
- use less than 30% of the total available credit in a disciplined manner;
- without resorting to bankruptcy or consumer proposal;
- do not repeat loan requests.
That’s in order of probability, but if it’s safe to say that one person’s credit history is lower than another’s, or that one of you is more likely to be in financial dire straits. If so, the consequences could be devastating to the other.
Please note: To complete the deal, you need to make an initial payment of at least 5% of the total value of the property.
Consider a scenario in which you have a combined mortgage with your loved one. Your partner used to have a good credit score at the time, but she lost her job recently. Lacking emergency funds, she is now struggling to pay off her share of the mortgage, blocked her credit card, and missed several payments.
At best, overuse of credit and default will only affect your credit score and make it difficult to get your next loan. On the other hand, you may also have trouble renewing your money debt or getting an attractive interest rate. In addition, the lender may wonder if they want to keep you as a client.
Impact of Credit Rating on Joint Mortgages
Because partner mortgage in Canada can result in all buyers holding equal ownership and loan interests, each individual’s credit history will be scrutinized. This is necessary to confirm that each of them can make the necessary payments promptly. Since you are financially tied, your co-owner’s name will appear on your report (and vice versa).
Factors that will help increase your chances of getting your mortgage approved:
- down payment over 20%;
- lack of unsecured loans in other financial institutions;
- you or your mortgage partner have no criminal record.
Unfortunately, if any of you have a bad credit rating (600 or less) or have outstanding debts, this will negatively impact your chance of getting approved. So, even though your combined financial strength will make it a bit easier to get a mortgage, you may still be turned down.
A Quick Look from the Side — Basics
As stated earlier, a potential joint buyer needs to have a good credit rating and high income at the time of application. As with a regular individual mortgage, the higher your total finances, the easier it will be to get approval for a large loan with a good repayment plan.
Joint mortgage versus classic mortgage
|One owner (100%)
|Higher down payment = lower costs
|Higher down payment = lower costs
|Minimum 5% (20% or more recommended)
|Minimum 5% (20% or more recommended)
It is worth noting that splitting a mortgage is safer if it happens to a family member. In this case, you can sign an additional agreement, which more precisely defines the rights and obligations of each of the parties. In case of misunderstanding the nuances of the process, you should contact a competent lawyer.
Responsibility for Unpaid Partner Debts
It is important to understand that both parties to a combined mortgage are equally responsible for paying off the joint debt. Regardless of the originator of the debt or your consent to split payments, in the eyes of the lender (and the courts), anyone whose name is associated with a loan application is vulnerable to debt collection.
Let’s look at another scenario to understand how the situation can get problematic:
You and your spouse have a joint credit card to buy groceries or other items. You agree to use this card for shared expenses only and split monthly payments equally. After a few months, you realize that your partner has used up the card limit without paying their share. You decide to talk to them about it, which leads to an argument. They pack their belongings and leave.
In the case of a joint loan, you will incur the following losses:
- seizure of property;
- freezing your financial accounts;
- negative impact on credit history;
- depriving you of your property rights.
Sounds awful, doesn’t it? However, the real drama here is that your financial commitments are still there. You can hire a lawyer to sue your partner to get the unpaid share from him. In the meantime, the credit card company will still want to receive its minimum monthly payments. Therefore, both parties to the transaction must understand the responsibility, both moral and financial.
The Advantages and Disadvantages of a Joint Mortgage
Before applying for a joint mortgage loan in Canada, it is important to weigh the pros and cons of this type of lending. Only after a detailed study of all aspects of the loan program can you make the right decision.
- Larger down payment – You and your co-buyers can combine your income for a larger down payment. If you can get at least 20% of the final asking price, you will not need to purchase mortgage insurance from CMHC.
- Tax incentives — all co-buyers who use the home as their primary residence and whose name appears on the title deed may be eligible for income tax reductions. In addition, the land transfer tax can be split between the co-owners, so that everyone will save a few dollars and pay their fair share.
- Large loan amount — as mentioned, the combination of multiple income and savings means you can qualify for a larger mortgage and buy a larger home or choose a better neighborhood.
- Shared costs — splitting a home between multiple buyers does not only provide mortgage benefits. You can also share all other expenses in your household, such as property taxes, utilities, renovations, etc. In addition, your total income can help add value to your home through remodeling and renovation.
- Disagreements on controversial issues. Simply put, it can be difficult to live with other people, especially if not everyone shares common interests and hobbies. There is always the possibility of controversy when it comes to deciding how to do household chores, mortgage payments, and other important issues.
- Difficulty exiting deal — once all names are in the deed of title, exiting for any reason can be very difficult and costly. Thus, in the event of a divorce, division, or quarrel between co-owners, all parties may be subject to sanctions.
- Potential Impact on your credit score — when it comes to a joint mortgage, all parties must make payments on time. If a borrower misses a turn, it will affect the credit ratings of all borrowers. Trust and communication are key when buying a home together.
Please note: Before applying for a joint mortgage, pay attention to other lending programs. You may also be able to try to save more money to increase your initial deposit.
Joint Mortgage: Afterword
The combination of income, down payments, and credit rating can help co-buyers get their dream home. Joint mortgages are a useful financial instrument, especially given the high value of real estate in most major Canadian cities. Just keep in mind that when there are multiple borrowers, trust and responsibility in each other will play an important role. You must anticipate and prepare for challenges so that you can better face them when the time is right.