There’s a lot you need to know when navigating the world of mortgages.
And, if you’re not careful, it’s quite easy to get tripped up in the lingo, the procedures, and the payments. (Not to mention the penalties.)
This is why we’ve recruited Jerome Trail, owner and broker of record at The Mortgage Trail, to answer the most important questions homebuyers and homeowners should understand before moving forward in their mortgage process.
Today, Trail is offering the answer to the inquiry: “What are the risks to entering a mortgage with someone else... Who isn't my spouse?”
Have another mortgage question, or looking for mortgage advice?
Contact Jerome at The Mortgage Trail — mention STOREYS, and you’ll receive a free appraisal!
When it comes to living arrangements in Canada, the situation is increasingly a multi-generational family affair. In fact, multi-generational housing is now one of the largest growing trends on the country's real estate front. High housing costs are a major contributor to this evolving trend; whether someone's seeking a main abode or a vacation home, it makes more sense than ever that they'd look around their family (and social) circle to see who may be interested in going in on a property together.
But, Trail says, there are important caveats someone should consider if they're about to take a conjoined-plunge on such a major purchase.
"The vast majority of mortgages in Canada are qualified by using a person's income," Trail explains. "If the income is not enough to qualify for the mortgage needed, it is common for someone else to come onto the mortgage application to help bolster the file strength so the original applicant(s) can get the mortgage they desire. What are the implications?"
In most cases, he says, the person coming onto file doesn't realize they've "encumbered" their income to the mortgage application, and that debt will impact their future borrowing power.
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"Let's look at an example," says Trail. "Susan purchased a pre-construction condo in 2017 for $400,000. The condo corporation is about to register and Susan needs to line up her mortgage. Susan put down $80,000 and needs to line-up $320,000 of financing."
In this situation, Susan's base salary is $50,000 per year, and when she qualifies for approximately $200,000 of mortgage financing, she needs someone else's support.
Susan's brother, Tom -- with his base salary of $50,000 -- agrees to come onto the deal.
"Tom's income allows Susan to close on her purchase, and Susan is quite pleased," Trail describes. "What Tom (more often than not) does not realize is that the entire $320,000 of financing, with him as 'guarantor,' will be considered a liability if he ever applies for a mortgage of his own. The challenge, if he does want to come off Susan's file - how will Susan qualify without him?"
In the same way a prenup may not be considered the most romantic part of a marriage agreement, entering a mortgage with someone who isn't your spouse calls for planning for the unexpected, even if it feels a little low-vibe.
A (written) agreement detailing the conjoined mortgage -- paired with an actionable plan for what one can do to continue paying their mortgage if they end up flying solo -- can preserve peace-of-mind where situations like this one are concerned. Indeed, the old adage "prepare for the worst, and hope for the best," is very fitting for this situation.
This article was produced in partnership with STOREYS Custom Studio.