Minimizing Risks: Legal Guide to Co-Signing Mortgages

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Co-signing a mortgage is not a decision anyone should take lightly.

Last year, I wrote about younger British Columbians’ growing use of co-ownership models to get a foot on the property ladder in our notoriously hot market. Since then, the case for teaming up with friends or family has only strengthened.

While house prices have hardly shifted — provincewide, the average home costs just under $1 million, with a figure closer to $1.3 million for property in Vancouver — the one big change in the market has come in the area of interest rates, which have shot up as the Bank of Canada moved to quell rising inflation.

The result is that homebuyers are facing higher income requirements than ever to convince their mortgage providers that they will be able to afford soaring monthly payments, not to mention the 20-per-cent down payment that must be found for million-dollar homes under mortgage insurance rules.

If you are thinking of co-signing a mortgage, I strongly recommend having a co-ownership agreement to minimize the chances of a legal issue later.

Here are my top four legal considerations when co-signing a mortgage.

1. Risk and Reward

It’s tempting to think of real estate as a risk-free investment, but the truth is that there are no guarantees that the property market will continue to rise indefinitely.

Should your co-signed mortgage end up in default with a higher outstanding balance than the value of the property, all co-owners who signed on with the lender could be on the hook for any shortfall — not just those who were making the monthly payments. That often comes as a shock to parents or other close family members who thought they were simply doing a favour for a loved one by going on title.

The agreement could be structured to reflect the significant risk that co-signers expose themselves to by providing them with a corresponding reward, such as a percentage of the proceeds if the property is sold.

2. The Final Chapter

It’s never pleasant to think about dying, whether it is your own passing or that of a loved one. Still, when it comes to co-signing a mortgage — a financial commitment whose length is measured in decades — it pays to consider mortality. This is especially important for those relying on parents for help with a downpayment or to boost their income for qualification purposes.

When a mortgage co-signer dies, their obligations transfer to their estate. The distribution of assets could be disrupted if the issue is not properly addressed in a will or if the borrower cannot repay the funds.

Parties to the co-ownership agreement can mitigate the risk of disruption by requiring that some or all of them purchase enough life insurance to cover the amount owing to the mortgage lender.

3. Tax Time

Having dealt with the first of life’s certainties in Benjamin Franklin’s famous quote (death), it’s time to take care of the other: taxes.

Co-owners on title at a property that is not their primary residence could be exposing themselves to serious tax consequences, including the possibility of a significant capital gains tax hit when the property sells.

Make sure to consult an accountant or tax specialist before co-signing a mortgage so you know where you stand and can take steps to limit your exposure.

4. Exit Strategy

One of the more predictable things about life is its unpredictability. A person’s life circumstances can change at any time, and the more people involved in a real estate purchase, the more difficult it will be to keep everyone’s interests aligned over time.

Whatever the underlying reason for a co-owner wanting to back out, relations will often become strained. But you can minimize the mess by having a mechanism built into your co-ownership agreement to account for the possibility of an exit, including when and how parties can initiate a sale of their share or the entire property.

For parents and children, co-signing a mortgage is often intended as a temporary stopgap, so it may make sense to formalize the arrangement by giving the parties an option to get off title under certain circumstances at a defined stage, such as the mortgage renewal date.

*This post is not intended to be legal advice and should not be taken as such. Please contact McConnan Bion O’Connor & Peterson if you have any questions regarding this post or require assistance or legal advice regarding a co-ownership agreement.