Every question you may have about co-signing answered!
With Canadian real estate values so incredibly high we see more and more the need for co-signers, guarantors and multiple mortgage applicants. For some families, there is an “all hands on deck approach” to securing a beachead in real estate.
Skip to our mortgage co-signing FAQ questions
It used to be co-borrowers and co-signers came up only rarely in running our mortgage brokering business. But over the past few years, we see it come up very often. It is very tough to qualify for a mortgage these days on the strength of a single applicant’s income. The math precludes it. In early 2022, the average home in the GTA and GVA is over $1.2 million. And if you have a 20% down payment, you may need gross household income over $200,000 in order to qualify for a mortgage. That cuts down the number of potential buyers considerably.
While I have a comprehensive article on mortgage co-signing – on this FAQ page, I bring you questions asked by my clients as they come to terms with the pros and cons of co-signing for someone else’s mortgage.
- Explaining terminology (for example difference between guarantor and co-signer)
- When a co-signer is needed and who make the best candidates?
- What can go wrong for the co-signer or the actual borrower?
- Are there steps you can take to protect yourself in a co-signing situation
That’s just a taste of what you can expect here at AskRoss. This, together with the other FAQ pages and the AskRoss blog https://askross.ca/articles are all written to help YOU.
Archive of Mortgage Co-Signing Questions
Who can co-sign for your mortgage application?
Anyone can do it, but the risk and negative implications to the co-signatory’s own future borrowing capacity basically means only family members are willing to do it. The co-signer is usually a close family member.
What is the difference between a guarantor and a co-signer
Both of them are fully responsible for the mortgage payments if for any reason the primary borrower does not make the required payments. However, the co-signer is also on title for the property and the guarantor is not.
It’s getting harder to find lenders who will allow guarantors – they want all parties on title. Credit Unions are more likely to agree than chartered banks in our experience.
Why would a guarantor not want to be on title?
That’s a really good question. Many feel if you are taking on the risk perhaps you should at least protect your position by having some equity in the property. However there are a few reasons we have come across.
1) Tax reasons. Even if registered as a 1% owner, this means the co-signer is likely liable for capital gains taxes down the road.
2) Land Transfer Tax Rebate. First time buyers are entitled to rebates and if there is a co-signer, that may cut into the amount they can claim.
3) Estate complications. If the co-signer dies it might cause issues for the primary borrowers.
4) We have seen instances where the adult child acted as a guarantor for their parent and did not want to lose their first time buyer rights.
Can an ex-spouse be a mortgage co-signer?
We’ve done files where exes cosign for each other. There are two lines of thinking. Many feel that healthy relationships with exes especially when children are involved should be encouraged.
Others feel this is trouble waiting to happen, especially when folks find a new partner who may not appreciate these never ending financial ties.
From some lenders’ perspective, there may be too much risk of the relationship falling apart. Which is why they prefer immediate family, because they feel less risk of the co-signer walking away in time of need.
What can go wrong for the mortgage co-signer?
Let’s start with the obvious. What will happen if the primary borrower can no longer make the payments? The co-signer is fully on the hook.
And if you want out of the arrangement, it’s not so simple. It takes all parties to agree. You, the borrower AND the lender.
Then there are the potential capital gains tax consequences and estate complications if either party pre-deceases the other.
There is the lack of privacy during the process. Everyone’s finances and credit are on the table for all to see.
And being a co-signer might cramp your own plans down the road when it comes time to do some mortgage or business or other financing.
Can the mortgage co-signer avoid capital gains taxes?
This is a question for your tax accountant and real estate lawyer. That said, there is a work around of a bare trust or beneficial trust agreement executed prior to or on the day of the purchase. By a lawyer – signed, witnessed and dated.
In this scenario, all parties are on title (in whatever percentage ownership you wish) and are each accountable to the mortgage. But, the agreement’s intent is to eliminate the potential for tax consequences for the co-signers as clearly they have no beneficial interest in the property. They are there simply to bolster the appplication – usually with their income and credit history.
This said you would need to be really careful in order avoid tax consequences. While this type of an agreement accomplishes the parties intentions (ie: the parents are Trustees and only hold Legal Title), the problem arises where Revenue Canada later challenges this scenario and asks for proof that the parents are, and have been from the outset, bare trustees – here, the parents would have to show that all downpayment came from the children and also that all mortgage payments and upkeep has been paid only by the children. This can sometimes be difficult to establish for Revenue Canada.
It can pose a problem from a Capital Gains perspective for the parents as they may be called upon by the CRA to establish/prove the existence of this Trustee/Beneficial Owner relationship beyond just the agreement itself.
If you do not wish to go the bare trust agreement route, in that case we recommend you can register the ownership to be only 1% for the co-signers; and have them take title as tenants in common instead of joint tenants.
Under tenants in common you assign percentage of ownership. 99-1 ensures 99% of the land transfer tax rebate to the first time buyer, and protects the parents from large taxable capital gains when the primary borrower sells the property. All parties remain equally responsible for the mortgage through.
Special thanks to real estate lawyer Gord Mohan, who provided his views on the bare trust agreement approach.
What about job loss, health crisis etc for the primary borrowers?
Consider insisting that the primary applicants have disability insurance protecting the mortgage payments, and you might also insist on life insurance to ensure the mortgage is paid off if there is an untimely demise.
Should a mortgage co-signer take out life insurance?
One of the things which can go wrong with a co-signing arrangement is if one of the parties dies prematurely. While it is definitely an extra expense, it is wise to consider cheap term insurance – certainly on the primary borrower. Most of the time the primary borrower is younger and insurance is reasonably affordable.
The reason you would do this is so that the mortgage gets paid in full if you die suddenly and there is no complicating mortgage left behind for your estate and co-signer to wrestle with.
Can you be a co-signer if you never owned a home?
If you don’t own a home yet, try not to be a co-borrower or co-signor as you will lose the privilege of getting first time home buyers PTT exemption. However if you are a guarantor, you still can get this privilege when you buy a house for the first time in Canada.