Joint Mortgage in Canada: All You Need to Know
What You Should Know
- A joint mortgage combines the incomes of multiple people to help qualify.
- You can have a joint mortgage with a spouse, friend, or anyone the lender will accept.
- If your mortgage partner misses payments, you may lose your home.
- Alternatives to help you qualify include co-signing, shared equity mortgages, house hacking, or just continuing to save.
A joint mortgage pools together the financial resources of multiple individuals to qualify for a mortgage. With a higher combined income, you'll be able to afford a larger mortgage or can now finally afford to get on the property ladder. Joint mortgages are commonly used by spouses, friends, investors, or anyone looking to get a home together.
However, you will all be liable for mortgage payments, meaning if someone fails to pay, you will need to make up the difference. There are many other liabilities associated with joint mortgages. It's essential to be aware of worst-case scenarios and how to prevent them. Continue reading to learn all you need to know about joint mortgages in Canada.
| Joint Mortgage | Single Mortgage | |
|---|---|---|
| Likelihood of receiving a mortgage | Increased chances due to higher income | Dependant on your income and credit score |
| Down payment size | Shared by multiple people | Only paid by you |
| Mortgage payments | Shared by multiple people | Only paid by you |
| Mortgage rate | Decreased due to appearing less risky | Dependant on your income and credit score |
| Home ownership | Shared by multiple people | Owned by you |
Joint Mortgage Explained
As mentioned above, a joint mortgage is where multiple people combine their financial resources to qualify for a mortgage. A higher combined income will help you meet debt service ratio requirements and even receive lower mortgage interest rates. You can get a joint mortgage with anyone if your mortgage lender approves. You will all have your name on the property deed title and will equally be liable for mortgage payments, property taxes, or any costs associated with owning the property. There are different variations to joint mortgages with other legal implications. The most common are explained below.
Joint Tenant
This is an equal split where you all equally own the home. It's the most common type of joint mortgage because spouses typically use it, as a joint tenancy or as a tenancy-in-common. If you decide to sell the house, all owners must agree. Additionally, if one person dies, the other automatically becomes the sole owner and inherits all the mortgage payments. As a result, it's essential to have mortgage life insurance to cover your partner's portion of payments should they pass away.
Joint Mortgage With Bad Credit
If one of the mortgage applicants has a poor credit score, it will negatively affect the whole application. Lenders want to ensure all participants are creditworthy and can hold up their side of the arrangement. You should also ensure your mortgage partner has quality financial habits to prevent them from defaulting.
Should your mortgage partner ever default, you will be liable for their missed payments. To prevent this scenario, you can require all joint mortgage participants to have insurance from a provider in Canada. This will provide them with income if they lose their job due to casualty, disability, or other reasons. If you can't make the payments yourself, you will also need to declare bankruptcy.
Tenants in Common
This is where each person owns a percentage of the home. It's typically used by friends or investors where one partner has more financial resources. For example, the higher-income friend could cover 60% of homeownership expenses. As a result, they'd own 60% of the home and the appreciation that comes with it. The ownership percentages and fee breakdown can vary to your choosing. However, in this agreement, it's essential to use a real estate lawyer experienced with tenants in common to construct a clear written contract.
If one partner wishes to sell before the other, there are options. After a few years of combined ownership, there should be some appreciation for the house. With this equity, one owner can buy out the other owner. The perfect time to do this is during a mortgage refinance, which typically happens every five years. Otherwise, the buying owner can use a second mortgage. However, there is an additional option if the other partner doesn’t want to sell and is beyond negotiation. A forced sale of the home can happen if one partner goes to court. Since all mortgage partners are listed on the property title, they have the option to sell the house.
However, there has to be sufficient home equity, and the buyer's financial situation must have improved to afford an individual mortgage. As a result, it's wise to include a minimum stay requirement of five to ten years for the tenants in common. Both partners should decide on a method to calculate the purchase price when beginning the tenancy. Additionally, the partner wishing to leave should cover mortgage application costs and any extra fees directly related to their departure. All of this should be written in the contract.
Joint Mortgage Pros and Cons
| Pros | Cons |
|---|---|
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Pros
- Higher chance of qualifying for a mortgage: Mortgage lenders compare your income with the associated costs of owning a home to qualify you for a mortgage. This is known as a debt service ratio which includes expenses such as monthly mortgage payments, property taxes, and utilities. Typically, lenders prefer to see no more than 35% of your income covering these costs. A higher income will increase your chances of qualifying, so long as the associated costs don't increase too much.
- Shared expenses: Buying a home is expensive. On top of down payment requirements, additional costs include land transfer tax, property insurance, inspection fees, and more. These are known as closing costs which cost roughly 3% - 4% of the total home purchase price. These expenses catch many homebuyers off-guard, and having a purchasing partner will help you share costs. After you have purchased the home, you can also share the costs of maintenance and property taxes on top of mortgage payments.
- Receive a larger mortgage: Finally, you'll likely be eligible to qualify for a larger mortgage with a larger income. Given the rapid price increase in Canada's housing market, you'll have sufficient funding to close deals quickly.
Cons
- Disagreements: The property is shared, so you'll need to work with your mortgage partners when making decisions about your home. This could mean compromising on a basement renovation or being forced to sell your home early. As mentioned previously, always work with an experienced real estate lawyer who understands the common challenges of joint mortgages. It's encouraged to predict these challenges and have a conversation with your partner. Always have an agreement in writing between you two.
- Increased Liabilities: You are responsible for ensuring the total mortgage gets paid. If your friend loses their job, you may need to pay for their portion of missed payments. If you fail to make the complete mortgage payments, your lender could foreclose your home, and you would be forced to sell it all together. As a result, make sure everyone has a sufficient emergency fund to cover at least three to five months of living expenses should they lose a job. Casualty and disability insurance is also an excellent option to ensure income if anyone can no longer work due to an injury.
- Lack of Privacy: If you are someone who needs privacy, getting a joint mortgage to live with friends could be challenging. Also, keep in mind if any of your friends want to have a partner move in or children within the coming years. Have conversations about everything.
Joint Mortgage Alternatives
Joint mortgages are a solution to help you qualify for a mortgage. However, the four most common alternatives include: co-signing, single mortgages, shared equity mortgages, and house hacking. Each has benefits and drawbacks, so it's essential to understand what each entails before deciding.
| Home Ownership | Property Decision Making | How it Helps | |
|---|---|---|---|
| Co-signer | Only owned by you | Only you | Increases creditworthiness |
| Shared equity mortgages | Shared with federal government | Only you | Increases down payment |
| House hacking | Only owned by you | Only you | Increases income |
| Save and wait | N/A | Only you | Time to focus on increasing all of the above |
1. Co-signer
This is where one person is the primary borrower, and the other is a co-signer. The co-signer is not an owner of the property, but they are liable for the mortgage payments. If the primary borrower fails to make payments, the co-borrower is responsible. Parents typically use this type of joint mortgage when helping their children buy a home.
This is the second most common alternative to a joint mortgage in Canada. Shared equity mortgages help reduce your down payment, but you will still be required to qualify for the mortgage. The benefit is that a larger down payment will reduce your monthly mortgage payments to help you meet debt ratio requirements. Your mortgage payments will take up a smaller percentage of your income. The catch is that your shared equity lender will own a portion of your home.
For example, if you receive a 5% loan through Canada's First-Time Home Buyer program, the federal government will own 5% of your home. You must pay this back within 15 years, and the loan value will increase with your property appreciation. There are multiple other municipal down payment assistance programs which are typically also shared equity mortgages.
3. House Hacking
House hacking is where you purchase a multi-unit property and live in one unit while renting out the other units. This can help you save on rent, increase your cash flow, and build equity in a property. The CMHC rules allow you to buy a multi-unit home of up to four units. You can have a minimum down payment of 5% and use up to 50% of the future rental income to qualify for a rental property mortgage.
However, there are a few things to consider. You'll still need to have some savings for the down payment and closing costs. Additionally, you'll need to be comfortable being a landlord. If you can meet this criteria, it's one of Canada's best wealth-building strategies while buying real estate.
4. Save and Wait
If none of the options above appeal to you, your final choice is to continue renting and save for a down payment. However, it could take you many years to afford a home as the property values continue to rise. It makes sense to continue renting instead of buying a home in some cases. We have this explained on our rent vs. buy calculator page.
The Bottom Line
When you are ready to buy a home, numerous options are available. However, one of the most popular is getting a joint mortgage with someone else in Canada. This allows you to qualify for a mortgage with a higher combined income.
There are four main alternatives, and each has its benefits and drawbacks, so it's essential to understand what they entail before deciding on which route to take. If none of these appeals to you, then save and wait until you can afford to buy a home on your own.