September 08 2022
With home prices relatively high over the past few years, many first-time buyers in Canada have looked to make a home purchase with more than one person. In most cases, it’s with family members but in some cases, it’s with friends. If you are considering buying a property with a friend or multiple friends, you aren’t just splitting the bill for dinner. It’s important that you and all parties involved get educated on the pros and cons and strongly consider the implications before making any big decisions.
The easy answer is yes. The process of co-buying is actually quite common. As long as you have one other person who can afford to maintain mortgage payments, then you’re all set. The process of co-buying a home can actually give first-time buyers greater support and flexibility to enter the housing market.
If you’re co-buying with a friend, you will apply for a joint mortgage. This type of mortgage is taken out by two people and treated differently than the conventional type. In Canada, there are two types of joining mortgage options:
A joining tenant mortgage is when all co-owners contribute an equal amount to the mortgage, so each individual has an equal ownership share of the property. No decisions can be made with all co-owners’ input and approval. This is the most common option for couples in long-term relationships.
Tenants in Common
A tenants in common mortgages does not give every co-owner equal ownership. It is based on how much money they contribute to the mortgage. This is often used when a group of people want to make a larger purchase for business purposes.
Now that you have some background on the types of mortgages that are available, let’s take a look at some of the pros and cons that you might come face-to-face with when purchasing a home with friends.
Doubles your buying power
With more than one income to pool from, you are more likely to have a down payment of at least 20% of the purchase price and perhaps afford a bigger home in a better area. This will help you qualify for better rates when applying for a mortgage.
No mortgage insurance
Mortgage insurance only applies when your down payment is less than 20%. This is because the lender is taking on larger equity of the home and therefore is subject to more risk. Since your down payment will likely surpass that 20% with two people, you and your friend will save on mortgage insurance.
While renting is a viable option for many, allowing yourself to have a stake in the housing market is a big stepping stone and gives you the opportunity to build equity. Instead of making monthly payments to someone else’s mortgage, you are now feeding money into your own future wealth.
Credit score matters
All buyers involved will need to get a credit check. If one of the buyers has a negative score, it could impact the overall mortgage terms, resulting in higher monthly payments for everyone involved.
This is a tedious but very important piece. When applying for a mortgage with a friend, your contract will not only outline the basics such as interest rates and mortgage terms, but it will also include joint tenancy, ownership shares and rights of survivorship agreements. These are all in place to help determine how to split the funds when the home is eventually sold.
May impact friendship
Purchasing a home with a friend is like going into business together – which can get tricky. There may be disagreements about how to handle certain parts of the property or someone may be late on payments. It’s recommended that you discuss all these issues with your co-buyers before considering a home purchase and only work with people who you can rely on.
The bottom line is that it depends on your situation. Buying a home with friends can be a great way to get into the housing market, but it can also present challenges that wouldn’t otherwise exist if you do it on your own. Always remember, that you are liable for the mortgage – even if it’s a co-ownership situation. If your friend defaults on their payment, it will fall on you to cover for them and vice-versa. If you do plan to make a purchase with a friend, it’s a good idea to maintain open dialogue with your co-owners, discuss all possible scenarios and carefully consider if investing in real estate with your friends is beneficial to you and your future.
If you and your friends are interested in discussing your mortgage options, Homewise can provide you with advice and guidance throughout the entire process. Apply online in 5 minutes and one of our dedicated Mortgage Advisors will be in touch to get you started!
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