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‘Serious consequences’ for co-signors, guarantors
As Canadian homes become less affordable, an overall theme has been emerging: more people are required to quality for a mortgage.
“We’re seeing more co-applicants, co-signors and guarantors,” says James Laird, co-CEO of Ratehub.ca and president of CanWise mortgage lender.
In many cases, a mortgage loan includes co-applicants who plan to purchase a home together. “Unless you’re a single person making significant above average income, two incomes are generally necessary to qualify for the average home in any Canadian major urban centre,” he says. “Many first-time homebuyers are waiting until they get married or have found their life partner to buy a home.”
In some cases, a lending institution may extend a loan to someone who’s just shy of meeting loan standards or if their income is insufficient to cover mortgage payments if the borrower can get a co-signer – someone who joins the primary applicant and takes responsibility for the loan in the event the primary borrower is unable to pay the mortgage, according to MortgageRates.ca.
A guarantor, on the other hand, vouches for the primary lender and guarantees the loan in the event the primary borrower defaults, but doesn’t share in the title of the home.
Guarantors are less common than co-signers, according to Ratehub.ca. Mortgage guarantors are generally used when the primary applicant has a reasonable income and credit profile but needs a little help to be approved for a better mortgage.
“The major distinction between a guarantor and a co-signer is the co-signer is on title of the house and a guarantor is only signed onto the debt and isn’t entitled to the house,” says Laird.
“Both are equally serious commitments because the liability from the debt from the mortgage perspective is the same. The mortgage lender can go after any co-signer or guarantor for 100 per cent of the mortgage debt outstanding.”
LOTS TO CONSIDER
Thinking about becoming a co-signor or guarantor but aren’t sure which is right for you? Consider this example: a young person has an income that isn’t yet high enough to purchase what they’re looking for on their own but should be high enough to qualify for the mortgage at some point.
In that case, a guarantor is a better structure because the co-signor can simply remove their name from the mortgage when the primary applicant can qualify for the mortgage on their own.
“A co-signer has to be removed from title of the home and because you’re essentially buying out one of the owners of the home, there are land transfer and capital gains tax implications so it’s a much a much messier exit,” says Laird.
What are some of the things you should consider if your child asks you to become a guarantor? “You need to think about whether you have confidence that he or she is going to be able to make the mortgage payments because if they can’t, you’re responsible for the entire mortgage payment,” he says.
Being a guarantor can also inhibit your ability to get your own mortgage if you need one because you need enough income to cover 100 per cent of your child’s mortgage and the mortgage you’re applying for as well.
It can also impact your personal relationship.
“Whenever you get into a business relationship that’s also a personal relationship, it can be very hazardous, especially if things don’t go well. You can picture the guarantor not being happy if they have to make the mortgage payment because the (primary mortgage holder) stops making payments. It would get even worse if there was a default and the guarantor is brought through that process as well.”
But there is a flip side. “A lot of parents I think fairly rationally recognize how difficult buying home in a major urban centre is,” says Laird. “They know it’s a lot harder than when they bought their first home. They see their kid working hard with a good job, but that job is just not enough to qualify for an average home.
“They empathize and say, ‘Our mortgage is paid off. What better use of ourselves than to help our children buy a home where they can have a family and raise kids?’ So even though it can be hazardous, you also understand why so many people think it’s a good idea to help a family member.”
Of course, there are other options than finding a co-signer or guarantor, Ratehub.ca reminds. A borrower may not be approved for a certain mortgage or a certain home but might quality for a less expensive home that will allow them to increase their down payment.
Another option is a different mortgage that offers a lower rate to help them pass the stress test. If one lender rejects you, that doesn’t mean all will. Other lenders may offer a lower rate and some might have lower lending criteria.
Home ownership dreams
Sixty per cent of Canadian millennials (those aged 26 to 41) who don’t currently own a home believe they will one day, according to a recent Royal LePage survey conducted by Leger. Of them, however, 52 per cent say they’d have to relocate to achieve that milestone.
When broken out by age, 62 per cent of respondents under the age of 35 say they believe they’ll own a home one day, compared to 56 per cent of those aged 35 and up. Meanwhile, 25 per cent of non-homeowner millennials across the country don’t believe they’ll ever own a home.
Of the millennials in Canada who don’t own a home, 68 per cent feel that home ownership is important. That figure is higher among those under the age of 35 at 72 per cent. According to the survey, 57 per cent of Canadian millennials are already homeowners. That figure is higher among those aged 35 and up at 63 per cent.