Many Canadians are working towards owning a home, however, with the cost of living and current home prices increasing, and income levels not keeping pace, it’s getting harder and harder for many people to make this dream a reality.
In Canada, affordability regulations play a big role in mortgages, and homebuyers need to save reasonably hefty down payments before they can even think of starting to shop for a home.
For some homebuyers, adding a cosigner to the mortgage is one way that family and friends can help, but there are pros and cons to this option. Let’s take a closer look.
You can Co-Sign a Mortgage?
When you apply for a mortgage, the lender you are applying to looks at your financial situation, your credit history, and other factors including your net worth. Sometimes, when you apply on your own, you might not qualify based on one or more of those factors.
You also might not qualify for the mortgage amount you need to buy the home you want. Adding a cosigner to your application effectively adds the cosigner’s financial history and net worth to your application. By cosigning the mortgage, the family member or friend is agreeing to cover your loan if you default or are unable to afford the payments. The lender then considers all of this information, and the result is usually that you can access the mortgage you need.
What Are the Pros of Co-Signing Mortgages?
The biggest benefit of co-signing a mortgage on behalf of your child, a relative or a friend is that they are much more likely to be approved for the mortgage they need. Helping someone buy a home is one of the biggest and most important things you can do for anyone.
What Are the Cons of Co-Signing Mortgages?
Co-signing a mortgage is a long-term commitment. Once you are on the mortgage, the only way to get off is if the person you co-signed for qualifies on their own, gets another co-signer, or sells the property.
You are also liable if they fail to pay their mortgage, which could leave you in a serious financial predicament.
Co-signing a mortgage also affects your own financial situation and can interfere with investments or credit applications you want to make in the future.
What Are the Alternatives to Co-Signing Mortgages?
There are several alternatives to co-signing a mortgage that you could consider.
One, if you can afford to, is to purchase the property on your own, and rent it to your child, relative, or friend until they are ready to take over the mortgage themselves. This gives you complete control of the property and makes it possible to sell it if necessary, at any point.
Another option is to help with the down payment. The larger the down payment that is made to secure a mortgage on the property, the lower the principal balance, interest, and payments will be. This might lower the mortgage amount enough for them to qualify on their own.
Mortgages, home financing, down payments, and co-signing mortgages are all complex, legal processes. If you’re not sure what the best option for you is, we highly suggest you speak to one of our mortgage professionals. We can help you get the information you need to make the best decisions when applying for a mortgage. Contact us today by clicking here.