Considering co-signing a mortgage? How to decide if it’s the right choice for you

I often get questions from clients about whether it makes sense to add a co-signer to their mortgage. The situations I’ve seen range from someone needing help with buying their first home, to someone needing assistance from loved ones during a challenging financial period such as recovering from bankruptcy or consumer proposal. Whether you’d like to help a family member or a close friend, you’ll want to understand the responsibilities and potential risks involved. Here’s a deep dive into what you need to know before you decide to co-sign a mortgage or ask someone to co-sign with you.

What does it mean to “co-sign a mortgage”?

When you co-sign a mortgage, you are essentially agreeing to take on the same financial responsibility as the primary borrower or borrowers. This means that if they fail to make payments, you will be legally obligated to cover the mortgage payments. As well, in Canada, co-signers are required to be registered on the property title. In other words, the co-signer becomes a co-owner of the property, in addition to being added to the mortgage.

Is it the same as being a guarantor on the mortgage?

In brief, no. In Canada, there are key differences between co-signing a mortgage and being a guarantor. A co-signer is equally responsible for the mortgage debt and is considered a co-borrower and co-owner. A guarantor, on the other hand, is not considered a co-borrower and does not have legal ownership of the property. The guarantor’s role is to guarantee the mortgage payments if the primary borrower defaults. This means a guarantor’s credit score might not be directly affected by the mortgage. And, acting as a guarantor allows you to avoid the tax implications of co-owning an additional property that is not your primary residence. A guarantor can be helpful in strengthening the mortgage application, but it’s less of a commitment.

What are the impacts of acting as a co-signer?

There are a few of these, on top of being responsible for the payments if the primary borrower or borrowers default. Co-signing a mortgage will appear on your credit report. S,o any missed payments or issues with the mortgage will impact your own credit score. The mortgage will also be factored into your own debt servicing ratios. So if you expect to be borrowing money during the time frame while you’re attached to the mortgage, your own purchasing power might be affected. Finally, there is potentially a tax impact to you, if you own another property. In Canada, capital gains on properties other than your primary residence are taxable. As such, when the property is sold, or when you are removed from the property title, co-signing a mortgage may result in a tax impact to you.

How best to make this work

Before co-signing, have an open and honest conversation with the primary borrower. You’ll want to thoroughly understand their financial situation and ability to make mortgage payments. Ensure that you trust the borrower and have confidence in their financial responsibility. Or, if you’re the one asking someone to co-sign, be transparent. This is a big ask, and you need to demonstrate your reliability.

It’s also a good idea to get both legal advice and tax advice. A lawyer can provide guidance on protecting your interests. Speaking to an accountant can assist you in how best to structure the ownership of the property and in what to expect in terms of the tax implications of co-signing a mortgage, down the road. Consider drafting a written agreement with the primary borrower or co-signer outlining the terms and conditions of the co-signing arrangement, and clearly stating who is responsible for future legal or tax costs, if applicable.

Finally, you’ll want to agree on the exit strategy. Options may include selling the property at a set date, or refinancing the mortgage and removing the co-signer from title.

Alternatives to explore

You’ll want to explore other options before deciding to co-sign a mortgage or asking someone to co-sign. Instead of agreeing to be a co-signer, you can also support your homebuyer in the following ways:

1 – see if it’s possible to be a guarantor rather than a co-signer

As noted above, acting as a guarantor carries fewer tax implications and credit implications. This may make it a preferable option for you, especially if you are only being added for a reason such as the homebuyer’s having a relatively new job or relatively new credit history. This is not always an option though. Sometimes a lender will insist that you be a co-signer rather than a guarantor. This is typically the case if your income is required to make the debt servicing ratios work.

2 – gift them a portion of the down payment

In Canada, mortgage lenders allow immediate family members to gift some or all of the down payment. This can help the homebuyer by reducing the amount of mortgage money they need, and therefore assist them in being able to qualify.

3 – provide a private loan

Instead of co-signing, you can consider lending money to the homebuyer to increase the size of their down payment. Be aware though, that the loan payments may cut into their purchasing power by impacting their debt servicing ratios.

4 – buy a second home that they can live in or rent from you

If you’re comfortable taking on a more active role, and your finances allow, you could look at buying the property yourself, and have them live in it and/or rent it from you. You may wish to offer them reduced rent, or plan on selling the property to them down the road at a agreed-upon price, if this feels like a better way to go. Again, you’ll want to discuss this option with a lawyer and an accountant to protect your interests. In addition, this is something you’ll want to work on with a mortgage broker, who can help you decide on the best mortgage options for you.

As always, make the decision once you have all the facts

Co-signing a mortgage is a generous act that can help someone achieve their dream of homeownership. However, it’s crucial to weigh the potential risks and responsibilities carefully. By understanding the implications and taking necessary precautions, you can make an informed decision that protects both your financial well-being and your relationship with the primary borrower or co-signer.

Want to chat about your options? Feel free to get in touch with me!

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