Co-signing a Mortgage: Pros and Cons

Co-signing a mortgage can be an important step, allowing a family member or friend to become a homeowner. However, it is important to think about the flipside of co-signing… the potential financial and personal risk that it implies.

Co-signing Explained

The first more obvious question you may have is how does co-signing a mortgage work? Co-signing happens when an individual, family member or loved one is provided a quote for a mortgage and has made the choice to sign the mortgage with a partner, or a person with joint liability. This person is called the co-signer.

The meaning of a co-signer is a legal title of an individual who is equally responsible for the mortgage and it’s ongoing payments. When you agree to co-sign, you are bound to the person seeking the mortgage and as a result, can be impacted both positively or negatively by how they manage it. Should the Mortgagor (the person borrowing money) miss a payment, that payment will default to the co-signer who is jointly liable to pay. All things considered, let’s go over some of the pro’s and con’s of choosing to be a co-signer on a mortgage.

Pro: Helping a Partner Achieve a Home

The main pro of co-signing a mortgage is that it enables a borrower to achieve ownership. Whether it is a childhood friend, a partner or a family member, it is important to consider your relationship with this person and the health and longevity of it in the future. If there is any possibility that your relationship with this person could change in the foreseeable future, it is not recommended that you co-sign.

However, if you co-sign a mortgage and need to get out of it, the primary borrower will have to apply and be reapproved for refinancing. At this point, the loan can be changed to their legal name. However, in the event that you establish a relationship with someone, you are still jointly responsible for the loan.

Pro: Unlock Better Loan Terms

In the event you choose to co-sign, your loan terms can become more favourable as a result of the co-signer’s strong financial portfolio. Larger loans may be available to you as a result of their financial position, allowing you to obtain more favourable interest rates and lower monthly payments.

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Does Cosigning Affect Your Credit?

If payments are made on time each month, then the mortgage will appear on the borrower’s credit report and help them to build a more secure financial future. Over time, this can improve your credit history. It is recommended that when using a loan, you continue to monitor your credit as well as your monthly expected/unexpected expenses. If you are financially responsible in terms of your loan and your existing credit, you can benefit from a co-signed mortgage.

Although not all elements of a co-signed mortgage are both stable and positive. It is equally as important to consider the difficulties of a mortgage so that you know how to protect yourself.

Con: Risking Your Own Credit Score

If the person you are signing for misses their payments or is not frequent with payments, it can have direct implications on your credit score. When you are thinking about co-signing a mortgage, look at the individual’s saving and spending habits to see how they spend their money more regularly.

Con: Equal Legal Responsibility

By far the most important factor to consider is the joint liability incurred when co-signing a mortgage. As a co-signer, you are equally and fully responsible for the debt until it is paid off, regardless of this person’s relation to you. Therefore, if you co-sign with an ex-partner or family member you are no longer on good terms with, it can become very difficult to get out of the agreement.

In the same way, if the borrower misses payments along the way, then the lender can pursue the co-signer for the full amount. In this case, legal action may be the next step, and this is certainly something you will want to avoid if possible.

Another challenge of co-signing is the difficulty of being released. In most cases, the primary homeowner will have to refinance the mortgage and then qualify to be the only person on title. If they are unable to refinance, they may have to sell the property.

Tax Implications of Co-signing a Mortgage in Canada

Depending on the area you live in or the jurisdiction you are co-signing in, tax implications may apply. In most cases, this includes capital gains tax and or an impact on the first-time buyer rebates. Sometimes tax implications are available, but this will differ depending on the location.

Guarantor vs Co-signer on a Mortgage

When you opt to be a guarantor, you will experience different privileges than a cosigner. As a guarantor, you are not on title for the property as an owner. The only time a Guarantor becomes responsible for payments is if the primary borrower defaults.

On the other hand, the meaning of “co-signer” is the person responsible for the mortgage payments from the very beginning of the agreement. Both of these roles assist the primary borrower in paying off the mortgage and, in many cases, improving their credit/loan terms; they just do so in different ways.

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Weighing the Pros & Cons

The pros and the cons seem to be relatively similar. In this case, there are a few key considerations. First, examine how the individual spends their money and if they are living within or above their payroll.

Another smart indicator of whether you should co-sign is the longevity of your relationship with this individual. If you are family members with them or partners with them, there is a deeper sense of trust and knowledge of one another shared versus a long-term family friend or new relationship.