Cosigning a Mortgage in Canada: What to Consider?

With rising home prices across Canada, buying a house has become increasingly difficult, especially for first-time homebuyers. If you have less-than-perfect credit or cannot qualify, you may ask a family member or friend to cosign on the mortgage with you.

Cosigning a mortgage is a major commitment, so the decision should not be taken lightly. This guide will explain everything you need about cosigning a mortgage in Canada, including the risks, requirements, and alternatives.

What is Cosigning a Mortgage?

Cosigning a mortgage means legally sharing responsibility for repaying the debt with the primary borrower. The cosigner signs their name to the mortgage application, loan documents, and the main applicant.

While the primary borrower receives the mortgage funds and gains ownership of the property, the cosigner does not. The cosigner’s role is to serve as a backup source of repayment for the lender if the primary borrower fails to make the required monthly mortgage payments.

By adding their name to the mortgage contract and title deed, the cosigner commits to taking over the outstanding mortgage balance should the primary borrower default on the loan or become unable to pay. Essentially, they improve the borrower’s chances of approval by demonstrating to the lender there is a second party capable of covering the monthly payments if needed.

Key responsibilities mortgage cosigners take on include:

• Legal obligation to repay the mortgage debt if the primary borrower misses payments
• Increased debt load on their record, impacting their ability to borrow
• Loss of certain first-time homebuyer incentives and programs
• Limited options to remove their name from the mortgage later on
• Shared ownership of the property with associated tax and legal implications

In short, a mortgage cosigner shares accountability for the financial mortgage commitment over its full term to help a primary borrower qualify who otherwise may not be approved independently. Cosigning a mortgage is a major decision that should not be taken lightly.

Cosigner vs Guarantor

A cosigner is a party to the mortgage contract and appears on the home’s title as a partial owner. The lender can seek mortgage payments from them at any time. A guarantor does not sign the mortgage documents or go on title. They only guarantee repayment of the mortgage in the event the primary borrower defaults.

Cosigners share responsibility for the full mortgage amount. Guarantors only guarantee the amount in default.

Cosigners are more commonly used for borrowers with poor credit or income. Guarantors back borrowers who meet most requirements but need a slight boost. They are less common and often require exceptions from the lender.

When Might You Need a Cosigner?

There are 5 situations where a mortgage applicant may need to bring on a cosigner to get approved:

Poor Credit History

If you have a low credit score, a history of missed payments, or delinquent accounts, it can negatively impact your ability to qualify for a competitive mortgage term and rate. The higher risk you pose can deter lenders. Adding a cosigner with a strong credit profile helps offset the risk associated with your poor credit.

Minimal or No Credit History

Lenders are hesitant to provide large loans to borrowers with unestablished credit. First-time homebuyers often fall into this scenario. With no track record to gauge your creditworthiness, a cosigner provides the reassurance needed for mortgage approval.

Self-Employed or Irregular Income

Being self-employed or having an irregular income from commissions, investments, seasonal work, etc., can make it difficult to prove your earnings potential to a lender’s satisfaction. A cosigner who earns a steady salary or fixed pension may help demonstrate consistent repayment capacity.

High Debt Levels

If your total debts, including car loans, student loans, credit cards and other liabilities, take up too much of your monthly income, lenders will view you as a risk for mortgage default. However, your debt-to-income ratio (GDS and TDS) can be offset by the income/liabilities of a cosigner.

Unaffordable Housing Market

In Canada’s expensive real estate landscape, some buyers may only qualify for a mortgage much lower than they need to purchase a suitable home. Adding a cosigner provides leverage to qualify for a higher mortgage amount and needed buying power.

What are the Characteristics of Potential Cosigners?

To qualify as an eligible mortgage cosigner, you must prove to the lender that you can take over the full monthly payments if the primary borrower cannot cover them. Typical requirements include:

• Good credit – A minimum score of 660 or higher is recommended, but the lender can vary the requirements. Your history should show minimal missed or late payments.
• Income – Expect to provide recent pay stubs, tax returns, or bank statements to verify your income levels. Retirees can use pension/investment funds.
• Assets – Liquid assets like your savings accounts may be assessed to confirm that you have cash reserves to repay the mortgage in a worst-case scenario. Many lenders require minimum assets of $50,000 or more.
• Low debt – Your total debts compared to income will be calculated to ensure you aren’t overextended. Allowable debt load limits often range from 35% to 42%.
• Stress test – As of 2018, all Canadian mortgage borrowers must prove they can still make payments if interest rates rise substantially by taking a mortgage stress test.

Meeting the cosigner criteria above reduces the lender’s risk and makes them more willing to approve a mortgage.

Benefits of Having a Cosigner on Your Mortgage

Having a cosigner can provide primary borrowers with several significant benefits:

• Access to better interest rates and loan terms

With a cosigner with good credit and financials, the primary borrower can qualify for lower interest rates, longer amortization periods, and other favourable terms that lenders offer to less risky borrowers. This can save thousands of dollars over the mortgage’s lifespan.

• Ability to qualify for a larger mortgage amount

On their own, the primary borrower may only qualify to borrow enough for a small starter home. Adding a cosigner allows them to gain approval for a higher mortgage appropriate for their family needs and local housing prices.

• Increased likelihood of mortgage approval

Primary borrowers with poor credit, high debt, or insufficient income are often denied mortgages when applying independently. The cosigner’s financial strength and low-risk profile significantly improve their approval chances.

• Can build credit history through on-time payments

As long as the mortgage payments are made in full and on time every month, being on the mortgage contract helps borrowers build a positive credit history and improve their credit scores. This aids future loan/credit approval.

Should You Become a Cosigner?

There are several disadvantages when deciding to cosign or be a cosigner on a mortgage.

• Legally responsible for total debt and property

If the borrower defaults, the cosigner becomes accountable for the remaining mortgage balance, which could easily be in the hundreds of thousands.

The cosigned home may impact the cosigner’s tax obligations, estate management if the borrower dies, and rights related to the sale.

• Affect cosigners’ credit score

Even one or two missed or late mortgage payments can cause the cosigner’s previously pristine credit score to plummet by over 100 points, leading to higher borrowing costs.

• Increased debt impacts borrowing capacity

The massive mortgage amount is added to the cosigner’s liabilities, increasing their debt ratios to levels that may prevent approval for needed loans or credit.

• Strain on a relationship if disagreements arise

Failed expectations over payments/defaults can seriously damage once close relationships with the borrower. This emotional and mental burden is lasting.

• Difficulty removing yourself as a cosigner later

Removing one’s name from a cosigned mortgage before renewal is extremely rare. The liability and reliance on borrowers continue for decades.

Given these potentially serious risks, cosigning a mortgage is not a casual commitment. For most people, the only time it is appropriate to consider cosigning is when helping an immediate family member, such as supporting grown kids unable to qualify on their own, yet as they take their first steps into independent home ownership, or elderly parents may need your assistance to refinance or enter assisted living arrangements.

How the Mortgage Cosigning Process Works?

The steps involved in applying for a mortgage with a cosigner in Canada are:

1. The primary borrower completes a mortgage application with the lender, indicating there will be a cosigner.
2. Required personal and financial information, such as ID, income proof, tax documents, and credit reports, is gathered from both the borrower and cosigner.
3. The lender evaluates the borrower and cosigner’s earnings, debts, assets, credit scores, and down payment funds available in detail.
4. Provided the borrower and cosigner meet approval requirements, the mortgage term and mortgage rate offer are extended.
5. Before the mortgage can be finalized, the cosigner must sign the contract, registering them as a co-owner and partial borrower.
6. Legal ownership registration of the property lists the cosigner as a joint or common tenant on the home’s title.
7. The borrower and cosigner negotiate shared financial obligations, such as covering closing costs, legal fees, and down payment percentages.

Adding a cosigner to your mortgage application can be beneficial, but don’t take their signature for granted. Have thorough discussions beforehand about the impacts on their finances and credit standing.

How to Remove a Cosigner from Your Mortgage?

Ending a cosigning arrangement usually requires some effort. Here are the most common options:

Refinance – If you, the primary borrower, have built enough income/credit to qualify independently, they can apply to refinance and remove the cosigner’s name.

Wait for renewal – Most mortgages renew every 5 years. The primary borrower can try to remove the cosigner when it’s time for renewal by proving sufficient financial strength.

Sell the home – If the cosigned mortgage is paid out from selling the home, the cosigning arrangement ends there. Any remaining proceeds are divided according to the cosigners’ ownership shares.

Legal release – In rare cases, lenders may allow a cosigner release with the primary retaining the mortgage on the condition they qualify for increased mortgage insurance premiums.

Removing a cosigner is not quick or easy. The primary borrower must demonstrate they can confidently handle the mortgage independently, which often takes years of payments to establish.

Alternatives to Getting a Mortgage Cosigner

While cosigning a mortgage can be helpful, it has risks and downsides. Here are some alternative options to consider before pursuing a cosigner:

Improve your credit – Work on increasing your credit score and addressing any issues in your history that caused mortgage denial. After 6 months to a year of progress, reapply on your own.

Save a larger down payment – Putting down 20% or more gives lenders greater confidence in your repayment ability. Build your savings to reduce the mortgage amount required.

Apply with alternative lenders – Alternative or private lenders offer mortgages to riskier borrowers but at higher interest rates. Explore these options if you barely missed qualification at a mainstream bank.

Seek down payment assistance – Government grants, subsidized programs, and special bank packages can provide the required down payment funds to make your application more appealing and affordable.

Get a guarantor – See if a guarantor who remains off title except guaranteeing the default risk will satisfy the lender rather than dragging a cosigner into full obligation.

Tips for Responsible Mortgage Cosigning

If you have carefully weighed the pros and cons and still plan to proceed with a mortgage cosigner, keep these tips in mind:

• Review all paperwork thoroughly before signing and keep copies for reference.
• Maintain access to the mortgage account to monitor the payment status.
• Consider requiring the primary borrower to get mortgage life insurance or mortgage disability insurance to cover the balance in case of death or illness.
• Discuss contingency plans for job loss, financial hardship or other struggles to prepare both parties.
• Understand the legal implications on your taxes, estate planning, and interests in the property. Seek professional legal and financial advice.
• Have open communication with the primary borrower leading up to and after cosigning.
• If your relationship deteriorates after cosigning, act quickly to remove yourself from the mortgage.
• Ensure you can truly afford to take over all payments comfortably if ever called upon as a last resort.

Key Takeaways: Cosigning a Mortgage in Canada

Cosigning a mortgage is an important decision that can help make homeownership possible. However, it also creates long-term financial implications that must not be minimized.

• If the primary borrower cannot make the monthly payments, a cosigner shares legal responsibility for repaying the mortgage loan.
• Financial qualifications like income, credit rating, and debts must be met by the cosigner to be approved.
• Benefits like easier approval come with substantial risks of damage to your credit rating and finances if things go sideways.
• Alternatives like improving your credit or working with alternative lenders may avoid needing a cosigner.
• You should only cosign a mortgage for immediate family members once you fully grasp the implications of your actions.

With proper precautions, cosigning a mortgage can still be undertaken safely in the limited scenarios where it makes sense.

At BestMO, our experienced brokers work hard to secure competitive rates and options tailored to your unique financial situation. Contact us today for personalized guidance you can trust.

FAQs

Article Sources

1. Cosigning On A Mortgage: Things You Need To Know – loanscanada.ca
2. What Does it Mean to Co-Sign a Loan? – cibc.com