With housing prices rising year after year in Canada, many first-time buyers find they need a little extra financial support to secure a mortgage. Co-signing a mortgage allows you to add another name, with another income, to your mortgage application, significantly increasing your chances of approval. Typically a mortgage co-signer will be a close family member or spouse of a borrower, as there’s little benefit for the mortgage co-signer themself.

We sat down with our partners at Lawvo to get your questions about co-signing answered from a legal professional.

Before you co-sign a mortgage here are some things you should know so that there aren’t any issues later down the line.

What is co-signing?

Adding a co-signer to your mortgage means that both parties are equally responsible for the loan. If mortgage payments are missed, both co-signers are equally on the hook for the payment, and both parties will have things like their credit score affected. The lender doesn’t care what personal arrangements you’ve made with regards to your mortgage, only that they get the money they’re owed. What this means is that you need to have a clearly defined agreement in advance with your mortgage co-signer. Often a parent will help a child purchase their first home by co-signing their mortgage to help them qualify, or spouses will co-sign a mortgage together when buying a home as a couple.

Who makes a good co-signer?

First of all, a co-signer is only useful if they have income. Income is the number one factor that lenders take into account when offering a mortgage, so adding on another borrower without income doesn’t give the lender any more assurance that the mortgage will be paid. The ideal co-signer has enough income to help you qualify for the amount of extra mortgage you need.

As there are a lot of risks involved for the co-signer and little potential gain, your co-signer should be someone you trust and is willing to do you a large favour. Typically this is a parent, a spouse, a sibling, or a close friend. 

It’s key to note that for all intents and purposes a co-signer is considered to have the full debt of the mortgage on their record, which means co-signing a mortgage will affect any future financial actions that involve evaluating their financial position, such as applying for a mortgage of their own. It’s unlikely that someone would want to be a co-signer on someone’s property if they planned to take out a mortgage or other loan of their own in the near future.

Legally, who owns the property when co-signing a mortgage? 

Unlike a guarantor,  co-signers name will be on the title of the home. As a result they will be considered  a partial owner of the home and they will have just as much right to the home as the person living in the home.

How would you go about getting the title changed on your home? 

Transfer of title is the process of adding or removing a person or several individuals from the ownership. This may happen when you buy a new house, or when adding a co-signer to a mortgage. You would need to retain the services of a real estate lawyer for the transfer of a property to another person.  Your real estate lawyer will be responsible for preparing all documentation and advising you if any land transfer tax would be applicable upon the transfer. In all cases of transfer of title, the following steps are required to complete the transfer including:

• Perform title searches
• Obtain title insurance
• Update the contents and fire insurance policy
• Update ownership records in the utility bills
• Advise current mortgage lender of the title changes
• Obtain appropriate legal advice for the tax and other implications of the title transfer

What would happen if one party defaulted on the mortgage and declared bankruptcy?

In law, a co-signer agrees to be responsible for the debt if the primary borrower cannot pay the debt. So what happens to the co-signer if the primary lender files for bankruptcy? The co-signer becomes responsible for the debt.

A bankruptcy may restrict creditors from collecting from the primary debtor but it does not impact the bank’s right to collect against the co-signer.  Therefore, the co-signer will be held responsible for making payments or for paying out the loan in full.

What happens if there is a dispute and one party wants to sell the property and the other doesn’t?

A common problem that we see today is when two or more people own a home and one of them refuses to sell. Whether it is in the context of an estate or family dispute, often the party who refuses to sell the property wants to buy out the other’s interest. The proposition is usually less than fair market value and parties are ultimately unable to come to a resolution. This is when the owner who wants to sell asks a lawyer for assistance in making an application in Ontario for example under the Partition Act, RSO 1990, c. P.4 for the partition (the physical division of the land) or a sale of the shared property.

The law in Ontario is that an owner has a prima facie right to partition and sale, regardless of whether their real estate interests are as joint tenants or tenants in common. The other owner, in turn, has a corresponding obligation to permit the sale. Usually, the only circumstances where a court will not allow a partition or sale is if there is vexatious, oppressive or malicious conduct.

When there are competing partition proposals by the owners, the court will consider all the circumstances, including:

• the extent to which the parties agree on aspects of the proposed partition; and
• the past and present use of the property by the parties.

An application for the sale of a property is more common than partition because rarely do parties want to physically divide the property. When a sale is obtained by an application to the court, the proceeds are divided between the co-owners.

If you’re looking for legal help related to real estate, Lawvo is an online platform that will help connect you with legal professionals.

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