A special guest post from your friends at Loans Canada.
Buying a home is a huge milestone for many Canadians. However, saving enough for a down payment and budgeting for the monthly mortgage payments is no easy feat. It is a huge financial commitment and can take many years of saving before you are financially stable enough to take the plunge. Moreover, with current home prices in Canada, individual mortgages can be hard to qualify for. This is why so many consumers, in long-term relationships and even consumers who aren’t, choose to purchase a home with someone else.
What Is a Joint Mortgage?
A joint mortgage is the same as a regular mortgage except there is more than one person’s name on the property title. Joint mortgages are usually taken out by two people in a long-term relationship, however, it is not limited to that. Individuals can take out a joint mortgage with their parents, friends, or even business partners.
Types of Joint Mortgages
In Canada, joint tenants and tenants in common are the two main types of joint mortgages. Which one you choose will depend on who you want to get a joint mortgage with.
Joint Tenants
Joint tenant mortgages are quite common and are often used by individuals in long-term relationships. When you get a joint tenancy you’ll be treated as a single owner even though there are two names on the property title. As such, any decisions regarding the property, such as selling the property, have to be made in unison. Moreover, with joint tenant mortgages, you and your partner will have equal ownership of the property. In the event, your partner passes, their share of the property will be transferred over to you and vice versa.
Tenants in Common
Tenants in common mortgages are a good option for friends, family members, or business partners who want to purchase a property together. With the tenants in common mortgages, the property share can be divided according to how much each person invests. For example, if one person is contributing 75% of the purchase price while the other is contributing 25%, it will be reflected in the deed of ownership.
Moreover, unlike the joint tenant mortgages, when one partner dies, their share of the property does not automatically transfer to the other partners. Rather it gets handed down to their beneficiaries. If they do not have any beneficiaries, an administrator will be appointed by the court in order to determine who gets their share of the property.
How is a Joint Mortgage Different from an Individual Mortgage?
Joint Mortgage (Joint Tenants) | Joint Mortgage (Tenants in Common) | Individual Mortgage | |
Property Share | Equally divided | Divided according to how much each person invests. | Sole ownership |
Ownership After Death | If you or your partner dies, the property is handed to the surviving partner. | If you die your share of the property will be given to your beneficiaries. | If you die your share of the property will be given to your beneficiaries. |
Down Payment | With two incomes, you can offer a larger down payment and potentially avoid mortgage default insurance premiums. | With two incomes, you can offer a larger down payment and potentially avoid mortgage default insurance premiums | With a single income, your down payment will likely be smaller which means you may have to pay mortgage default insurance premiums. |
Purchasing Power | With two incomes, you’ll be able to afford a larger mortgage. | With two incomes, you’ll be able to afford a larger mortgage. | With a single stream of income, you won’t be able to qualify for as large a mortgage as two or more people. |
Whose Credit Score is Considered When Applying for a Joint Mortgage?
When you get a joint mortgage, all borrowers must meet the requirements of the lender to get the best mortgage rates. As such, if your partner, friend, or business partner has a bad credit score or a lot of debt it can affect your borrowing capabilities and make the mortgage more expensive. It is for this reason that you should openly discuss your finances with each other prior to applying for a joint mortgage. If you know that your co-owner has bad credit or a lot of debt, it may be worth waiting and having them regain better control of their finances before venturing into a joint mortgage with them.
Benefits and Drawbacks of Joint Mortgage
While a joint mortgage has its benefits, it also has its drawbacks. Here, we’ll discuss some of the conveniences of a joint mortgage as well as the obstacles you may face with a joint mortgage.
Benefits
● Larger Loan - When you apply for a joint mortgage, each borrower’s income, assets and debts are considered by the lender. As such, lenders are more likely to approve you for a larger mortgage as there are two incomes available to make the monthly payments. However, just as both incomes are considered so are the debts. As such, if your partner has a significant amount of debt, it can affect your ability to qualify.
● Larger Down Payment - With two income streams you are more likely to provide a larger down payment. The bigger your down payment, the less you’ll have to pay for mortgage default insurance premiums. For example, if you make a down payment of 15% instead of 5% on a 350,000 home, you’ll pay $8,330 instead of $13,300 on your mortgage default insurance. That’s almost five thousand dollars in savings.
● Shared Expenses - House maintenance and repairs are not just costly but take time and effort. By purchasing a house with another individual, you can share this responsibility between your co-owners.
Drawbacks
● Missed Payments - When you get a joint mortgage especially with a friend or business partner, you’ll expect them to do their part. However, if your co-owner slacks off or is hit with an expected financial issue, you’ll be expected to cover their share of the mortgage payment. If you don’t it can lead to missed or late payments which will affect both of your credit scores.
● Financial Health - As mentioned, when you apply for a joint mortgage, every borrower’s financial health is evaluated and expected to meet the requirements of the lender. As such, if anyone of the borrowers has a lot of debt or a bad credit score or history, it will affect your ability to qualify for a good mortgage rate.
● Relationship Ties - With a mortgage being a huge financial commitment, it’s only natural that when you get a joint mortgage, it is with someone you have a good relationship with like your parents, partner, friend or business partner. However, differing opinions, financial strain and other problems can arise and affect your relationship, which in turn can make your mortgage a big problem.
Is a Joint Mortgage Worth it?
Joint mortgages are quite common and play a critical role in helping a large part of the population afford a mortgage. With housing prices so high, joint mortgages can help Canadians realize their dream of owning a home. From increasing your purchasing power to sharing property maintenance responsibilities, joint mortgages have many advantages. Just be sure you financially trust the person you’re about to invest with. Buying a house is a huge financial commitment and can easily put a strain on your relationship if your partner is not keeping up.
