The joint mortgage is pretty common in Canada and continues to grow in popularity. But why? As the cost of housing in Canada surges to new highs, many are being shut out of the real estate market; they are unable to secure affordable housing or build wealth. In many cities, the income and down payment required to qualify for a mortgage are totally out of reach. So where does that leave you? You can either keep renting, living at home, or you can pool your resources with another person and buy a house together. That’s where the joint mortgage comes in. Let’s talk about a joint mortgage and how it can help you unlock the door to homeownership.
What is a joint mortgage?
Joint mortgages are commonly chosen by couples, like spouses or common-law partners, who want to buy a house together. If approved, the parties involved share the legal and financial obligations of the mortgage loan. They co-own the property together, which means they each have a financial and legal interest in the asset. The joint mortgage holders are both responsible for making the mortgage payments each month and maintaining the property.
However, couples are not the only ones who co-buy real estate together. There are different types of joint mortgages depending on the relationship between the people involved and the nature of the transaction. As the Canadian housing market continues to inflate, the joint mortgage offers a viable path to homeownership for many people.
Younger Canadians are buying homes with parents, siblings, and even close friends. Others are helping their parents secure more affordable housing post-retirement. Joint mortgages are also an option for those looking to invest in real estate with another person, or several people.
There are two kinds of joint mortgages in Canada. The one you choose will depend on your relationship with the person you are buying property with and the nature of the transaction. Let’s take a look.
A joint-tenants mortgage is the most popular type of joint mortgage among spouses and common-law partners. With a joint tenant’s mortgage, you both apply for the mortgage together. If approved, both your names appear on the mortgage documents and you equally share in the financial and legal obligations. You co-own the property together, and both have a legal claim to the asset and any equity.
With a joint tenant’s mortgage, you and the other person are treated as one borrower by the mortgage lender. That means you cannot refinance or renew the mortgage, nor sell the property, without the other person’s consenting signature. You cannot even make renovations to the property without their approval.
Just as you are both equally responsible for the mortgage, you both typically share equal ownership of the property as well. Should one of you pass away, the deceased person’s portion of the property is automatically transferred to the surviving partner. The surviving partner then becomes the sole property owner and assumes full responsibility for the mortgage and all aspects of homeownership.
Tenants-in-common is a type of joint mortgage typically used by business partners or less familial co-buyers like friends purchasing property together. This type of joint mortgage doesn’t necessarily split co-ownership equally among the purchasing parties. Rather, shares of the property can be divided based on how much each person has invested, or some other share agreement.
If one of the purchasing parties dies, their share of the property does not get transferred to the surviving co-owners. Rather, it gets handed down to the beneficiary named in the deceased person’s will. If there is no legal will or named beneficiary, their share of the property will transfer to their next of kin. In the event one of the co-owners wants to give up their share of the property, legal documents can be prepared in order to sell their share of the property to the remaining co-owners.
Joint mortgage vs co-signer: what’s the difference?
Joint mortgage and mortgage co-signer are often thrown around interchangeably. While there can be overlap, the two terms mean very different things in the wonderful world of lending. It is apples and oranges.
A mortgage co-signer is someone who agrees to pay the mortgage in the event the primary borrower cannot. Generally, a mortgage co-signer does not have any share in the property or ownership rights, but that’s not always the case. Their name may or may not appear on the title of the property depending on the relationship and nature of the transaction.
Co-signers must submit to the mortgage application process to prove they are creditworthy and financially fit. That includes a full credit check and verification of their income, assets, and debts. In most cases, a co-signer is not making an investment in the property, like providing a portion of the down payment for example. They are simply giving your application a boost with their credit score, financials, and promise to pay if you can’t.
A joint mortgage, on other hand, typically refers to people who will share ownership of the property together, which is common among spouses and domestic partners. It is very similar to a mortgage with a co-signer in that all joint mortgage applicants must submit to the application process in order to qualify. That includes full credit checks and verification of income, debts, and assets.
Joint mortgage holders are all equally responsible for the mortgage, are named on the mortgage documents, property title, and have legal rights to the property. Decisions must be made together with everyone’s approval. Most joint mortgages involve co-ownership and interest in the property, but that’s not always the case. For the sake of this article, we are going to assume joint mortgage holders also co-own the property together.
Why get a joint mortgage?
A joint mortgage can increase your odds of being approved for a mortgage loan. It helps overcome the financial barriers that stand between you and homeownership. When you buy a house with another person, or people, you can pool your resources together to meet the affordability threshold and increase the amount of your down payment. Lenders like joint mortgages too.
When two or more people enter a joint mortgage together they are both equally responsible for the mortgage payment. If one person is unable to pay, the lender has someone else to collect from. That makes your mortgage loan less risky. Your combined income and assets make your financial situation stronger too. You are less vulnerable to financial hardship when there are two or more incomes available to carry the financial burden, and more assets to tap into if you fall on hard times.
The benefits of a joint mortgage
Joint mortgages don’t just increase the odds of approval, they can be a smart financial move for both the short and long term. Joint mortgage borrowers usually each contribute to the down payment and share the applicable closing costs. But there are other advantages too. Let’s take a look at some obvious, and not so obvious benefits of a joint mortgage.
A bigger down payment
When two or more people buy a house together, they often provide a much bigger down payment than a single borrower could provide on their own. The larger the down payment, the smaller the total mortgage loan will be. That has a ripple effect making the monthly mortgage payment lower and decreasing the amount of interest you’ll pay over the life of the mortgage.
Obviously, people pool the cash they have on hand, but they can tap into other resources too. In Canada, first-time homebuyers can use their RRSPs to purchase a house through the Home Buyer’s Plan (HBP). Each qualified person can withdraw up to $35,000 from their respective RRSP accounts. If two people purchase a home together, that’s a potential $70,000 down payment.
More equity, fewer fees
In Canada, you can put as little as 5% down on a house under $500,000. While that can make homeownership more accessible, it comes with a hidden cost. Anytime a homebuyer provides less than a 20% down payment, their mortgage loan is considered high-ratio and requires mortgage default insurance.
The cost of mortgage default insurance is added to the mortgage loan balance and is subject to mortgage interest charges. When joint mortgage borrowers pool their funds they may have enough money between them to provide at least a 20% down payment for a conventional mortgage. Doing so gives them more equity in the property off the hop, and avoids costly mortgage default insurance and the extra interest it accrues.
Better interest rate
A couple of things determine the mortgage interest rate a lender will offer you, namely your credit score and the size of your down payment. When you apply for a joint mortgage with another person, or people, the lender will blend your credit scores. That has the potential to boost your average credit score high enough to unlock a better interest rate.
Then there’s the down payment, again. Lenders give better interest rates to those with bigger down payments. It lowers the size of your mortgage loan, which lowers your monthly mortgage payment, and increases your financial interest in the property. All of which make your mortgage far less risky for the lender. So they reward you with a better mortgage interest rate. Naturally, the lower your mortgage interest rate is, the less interest you will pay to the lender over the life of your mortgage. Simply put, a lower interest rate saves you money.
Higher loan amount
A joint mortgage can also help you afford a more expensive house, or one in a more desirable area, than you would have otherwise qualified for on your own. Your income is one of the major factors that influence how much house you can actually afford. A single borrower with a killer credit score is less likely to qualify for a large mortgage loan because they have to be able to afford the house on a single income.
When two or more people apply for a joint mortgage, their finances are blended and everyone’s income is used to determine what size mortgage the borrowers qualify for. So, in addition to boosting the size of the down payment, more income streams can support a higher mortgage payment. The more household income there is, the more likely you are to qualify for a larger mortgage loan.
Buying a house is half the battle. Maintaining it is the other half. When you buy a house with other people, you can share the financial responsibility of general upkeep, repairs, utilities, and property taxes. If a major repair is needed, like a new roof or hot water tank, you have others to help share the expense. The ongoing cost of homeownership can add up quickly, especially if the buck stops with you. But when you have a joint mortgage with co-owners, you are all responsible for taking care of the property and the expenses that go with it.
A joint mortgage has drawbacks too
Of course, the benefits of a joint mortgage are just one side of the coin. On the other side, those same benefits also introduce a layer of risk. When you enter into a binding financial relationship with other people, there are a lot of variables outside your control that can have a direct impact on you. Let’s take a look at some of the drawbacks to consider before you enter into a joint mortgage with someone.
Conflict and exit strategy
Whether it’s a relationship breakdown between companions, conflict between friends, or real estate partners parting ways, breaking up is hard to do; especially for joint mortgage holders. When things go south you generally have two options: you can buy out the other person’s share of equity. Or, you can sell the property and split the proceeds based on each person’s share of the equity. If the conflict is contentious, that could lead to a legal conflict as well. You should always choose your joint mortgage holder(s) wisely. But, at the end of the day you cannot control other people’s behaviour.
Loss of income
It doesn’t matter what the payment arrangement is between you and the other joint mortgage holder(s), the lender holds all of you 100% responsible for making the mortgage payment. Lenders do not care if your spouse lost their job, or if your friend’s hours were slashed at work. If the other person can’t keep up their end of the bargain, you have to make the mortgage payment or risk going into default.
This is especially sticky if the mortgage approval required everyone’s combined income in order to qualify for the mortgage in the first place. If someone loses a job, is seriously injured, or otherwise can longer contribute financially, it could have a significant impact on you. Missed payments wreak havoc on your credit score, not to mention the risk of foreclosure if you default on the mortgage. You and the other joint mortgage holders should consider income protection like disability or critical illness insurance or, in some cases, mortgage life insurance.
Many hands make light work, but too many chefs can spoil the soup. Everyone’s collective financials can help you get approved for a house together but it can also get in the way. Lenders will blend your credit scores to get an average. If your joint mortgage applicant(s) has a bad credit score, it could drag down the average and jeopardize your mortgage approval. Or, it could result in a higher mortgage interest rate, making your mortgage payment higher and the loan more expensive.
Joint mortgage applicants bring their income and assets to the table, but they also bring all their debts. If the other applicants carry a lot of debt, it could impact the debt-service-ratios lenders use in the mortgage qualification process. Their debt load could jeopardize your approval, or impact the mortgage interest rate. A higher interest rate can make the monthly mortgage payment higher, which has a direct impact on your monthly cash flow and budget. It up’s the ante, increasing the financial burden if you have to make the full payment by yourself down the road.
Also, more debt equals more monthly payment obligations. They are at higher risk of becoming over indebted which could threaten their ability to pay the mortgage. Joint mortgage holders share ownership of the property, which is an asset. In the event another joint mortgage holder becomes insolvent, requiring a consumer proposal or bankruptcy, that could have a significant impact on you.
Sometimes the worst case scenario happens when a joint mortgage holder passes away, leaving the surviving mortgage holder shouldering the debt. Before you enter into a joint mortgage with someone else, consider how you might be affected should they pass away suddenly. Whether you are purchasing with a significant other, family member, or friend, everyone should have appropriate life insurance coverage to protect the other mortgage holders from financial hardship in the event of a death. If it’s a tenant’s-in-common joint mortgage, all joint mortgage holders should have a will that clearly states who will inherit the deceased person’s share of the property.
How to get a joint mortgage in Canada
With a joint mortgage, each person involved is legally and financially responsible for the mortgage. Therefore, joint mortgage applicants must meet the lender’s qualification requirements in order to be approved for the mortgage loan. A joint mortgage can make it easier for you to buy a house, but it doesn’t guarantee you’ll be approved.
Each person must go through the application process to assess their financial fitness. If you apply for a mortgage through a federally regulated lender, like one of the Big 6 banks or a credit union, the application will need to pass the mortgage stress test; a calculation that measures total household income against total household debt and housing related costs. Just because one, or all of you, make a stellar income doesn’t mean your approval is a slam dunk. Their debt load could kill the deal. If one person has a bad credit score, that alone might not be grounds to reject the application. But it could impact the interest rate. On the other hand, if you all have weak or poor credit scores, then you could have a harder time getting approved.
Should you get a joint mortgage?
There is no right or wrong answer to this question. It depends on your unique financial situation, your relationship to the co-applicant(s), and nature of the transaction. For many, a joint mortgage makes it easier to access the housing market and makes homeownership more affordable. For couples, like spouses or domestic partners, it makes sense to share the obligations and protect your rights to the asset.
If owning a home would put you further ahead financially than if you continued to rent, but you are unable to qualify on your own, a joint mortgage could be the answer for you. However, you would need to consider the pros and cons of sharing ownership of the property with another person. If you need help unlocking the door to the housing market, but want more control over your investment, other options include:
- A guarantor
- A co-signer
- Postponing your purchase until you have a larger down payment
- Taking time to increase your credit score
- Increasing your income, either through career progression or building additional income streams
- Using your RRSPs through the Home Buyer’s Plan (HBP)
- Consider relocating to a low cost of living area