Joint Mortgages, The Pros & Cons
Tags: affordable home purchase ontario
Buying a home in Canada is steadily becoming more challenging. With rising home prices and the impact of the stress test becoming more acute, more and more Canadian families no longer qualify for a mortgage large enough to support the purchase of a home. In response to these pressures, a type of mortgage that used to be reserved for income properties is gaining popularity: the joint mortgage.
If you’re struggling to qualify for a mortgage large enough to let you purchase a home, you may be wondering if a joint mortgage is for you. There are advantages and disadvantages to a joint mortgage, which we’ll look at below.
What Is A Joint Mortgage?
Here in Canada a joint mortgage is a mortgage between two or more people (sometimes up to three or four). The most common type of joint mortgage is taken out between two partners in a relationship. This type of joint mortgage is now so common that we’re going to exclude it from this discussion and focus only on the other type of joint mortgage: one between several people who aren’t linked romantically.
Applying for a joint mortgage often includes joint ownership of the property, but not always. It’s most common in a business relationship where an income property is involved. After that, the most common type is a joint mortgage with parents in Canada who choose to combine forces, to improve their children’s mortgage eligibility. Recently, there has also been an uptick in friends and siblings purchasing properties together. There are several advantages of applying for a joint mortgage, and some looming disadvantages.
Joint vs Solo Mortgages At A Glance
Here’s a quick look at some of the differences between a joint mortgage and a traditional, solo mortgage.
Advantages of a Joint Mortgage
First, let’s take a look at the three main advantages of a joint mortgage in Canada.
1. Larger down payment, less fees
In Canada, the minimum down payment for a home is 5% of the purchase price. If you apply for a mortgage with a minimum down payment, you’ll need to pay mortgage default insurance, which protects your lender in the event you default on your loan. If you apply for a joint home loan with a friend or another mortgagee, they may be able to add funds to your down payment.
Increasing your down payment size will decrease your mortgage default insurance premiums and increase your overall equity in the home. For example, here’s the difference between a 5% and 15% down payment on a $400,000 home with some of the best Canadian mortgage rates.
You can learn more about how a larger down payment will affect your premiums and equity, what you can afford and how differnt rates will affect you by using our mortgage calculators.
2. More purchasing power
Have you wondered how large of a mortgage can I afford alone versus with partners? The good news is that when you submit a joint application for a mortgage through a broker to help obtain the best current mortgage rates, each of you is considered by the lender on your ability to afford the mortgage. That means everyone’s income, debts, and credit scores are considered, and the lender will make an assessment on the ability of all borrowers to pay the mortgage.
As a result, it’s common for joint mortgages to be larger in size, since more people (and their incomes) are available to make the monthly payment. This increase in mortgage affordability can be useful if you’re shopping for a home in an expensive market. To see just how much extra partners affect your mortgage amount, use our mortgage afforability calculator.
3. Shared responsibilities
If you’re considering purchasing a home with friends or family where all purchasers will share responsibility for the home, then annual maintenance and upkeep can also be shared. Sharing maintenance and upkeep can be beneficial because the costs are lower per person. Remember, lower costs only applies to joint mortgages where purchasers are sharing this responsibility. If you’re purchasing with your parents for example, they may prefer you take sole responsibility for upkeep and maintenance.
Disadvantages of a joint mortgage
Joint mortgages can make a home more affordable for the average buyer, but a purchase of this size comes with a lot of responsibility, and things can go wrong. Here are the primary disadvantages to taking out a joint mortgage.
1. Differing intentions
Before entering into a joint mortgage with family, friends, or business partners, make sure to have an in-depth discussion about your long-term intentions with the property. For example, if one of you is planning to claim the Canadian First Time Home Buyers Incentive, who is responsible for paying it back?
Most mortgages have an amortization of 25 years or more, and while you may not necessarily keep the property for that long, you should plan as though you were. Make sure to ask your partners what will happen when one of you wants to sell the property, and when that might be. Discuss all possible outcomes, because you never know what is going to happen.
2. Loss of employment
Pursuing a joint mortgage with multiple partners helps increase the amount of home you can afford. However, you’re still responsible for paying the entire mortgage payment if a joint mortgagee loses a job, or are otherwise unable to contribute. To this end, it’s important to map out contingency plans to ensure you won’t end up defaulting on your mortgage payments if one of the joint mortgagees can’t make their monthly payments.
It’s also important to plan for the absolute worse case scenario. If you or one of your mortgagee were to die before the mortgage is paid off, the surviving mortgagees are responsible for paying off the entire mortgage. A good life insurance policy is the best way to protect your home, and every mortgagee should have cover that will pay for their share of the home if they were to die. Joint life insurance is one option, but having separate policies is also fine, provided the premiums are paid.
3. Interpersonal problems
Joint mortgages are usually executed between family members, business partners, or very close friends. The reason for this is because taking on a mortgage is a huge financial commitment. Mortgages are typically only shared when you have a very strong personal tie to the other members of the party.
Joint mortgages between family members tend to be safer, as family ties are often strong enough to limit any fallout from interpersonal problems. Of course, this isn’t always the case! A joint mortgage with a friend – even a best friend – is likely to be riskier. In any case, your relationship to a potential co-owner should be carefully examined before making such a big financial commitment together.
Alternatives to a joint mortgage
There are lots of reasons why a joint mortgage might be appealing. You might not have a big down payment, want to live in a more expensive area, or want to avoid a bad credit mortgage. In any case, there are a few alternatives to a joint mortgage you could consider.
1. Co-sign a mortgage
If you aren’t sure whether a joint mortgage is the right choice for you, you could consider having a co-signer on your mortgage instead. A co-signer is a more arm’s length relationship where a family member (usually your parents) add their weight to your mortgage application. Co-signing essentially means they lend their financial information and credit score to your application. Your co-signer will agree to be financially responsible for your mortgage in the event you can’t make your monthly mortgage payment, but your co-signers won’t usually add money to your down payment amount, and they won’t be responsible for the upkeep or maintenance of the property.
2. The first-time home buyers incentive
The first time home buyers incentive is a federal government program that aims to give first-time home buyer’s more purchasing power. It’s essentially a shared equity mortgage with the federal government, which will pay and own up to 10% of the cost of the home. It’s not always the best option though, so makes sure you do your research.
If you are a first time home buyer however, be sure to check out all of the programs available to you, including the first time home buyers tax credit
3. Save a larger down payment, or buy a cheaper home
If a joint or co-signed mortgage doesn’t suit you, but you still need more purchasing power, then you may need to go back to basics. The best way to purchase a larger home is to save a larger down payment. Not only will you be able to borrow more, you’ll save a significant amount of money by increasing your down payment on the same size mortgage.
The other option is to purchase a cheaper home. This could mean buying a condo instead of a free-standing house, buying a smaller home of any type, or buying in a less expensive suburb. While it’s a compromise, if it means the difference between struggling with your mortgage payments, it could be one worth making.
The bottom line
Joint mortgages are becoming more common in today’s hot mortgage market. Today, friends and even strangers are opting to purchase homes together, in the name of getting into the market. But buying a home with others is a huge commitment, and one that should not be entered into lightly. If you’re considering a joint mortgage, consider all eventualities carefully and discuss them openly with your potential partners before leaping into homeownership together.