Help with Mortgages- What is a Co-signer?
With the recent CMHC changes making it more difficult for some buyers to get a mortgage, we are seeing more and more buyers asking a friend or a relative to “co-sign” on their mortgage to get approval. It is important to know that, most often, this will have an effect on how title to the property must be taken because the “co-signer” will have to go on title. Below we discuss what this means and what can be done about it.
1. What is a “co-signer” and who is on title?
What is a co-signer, and who must go on title on a purchase? This issue often arises because a lot of people are getting help with financing from friends or relatives. Legally speaking, there is no such thing as a “co-signer”. The person providing the help with the mortgage is either going to do so as a “borrower” or as a “guarantor”. These are the legal terms and most people use “co-signer” to cover both, but they have different implications.
Most of the time when a person helps someone else get a mortgage, he/she will have to be a borrower. This is because CMHC will use their income to qualify the mortgage. However, what they must know, and what the person receiving the help on the mortgage must know, is that, as borrowers, the person helping must be on title to the property. That is, he/she must become an owner of the property.
This can present an issue because the person helping with the mortgage is not putting down any money towards the purchase and the “real” owner may not want to give up any ownership to the person helping with the mortgage. Also, as a borrower and co-owner, the signature and consent of the helper will be required in the future to sell, mortgage or deal with the property and the real buyer might not want to be held back by the person providing the help with the mortgage.
One way this ownership issue can be dealt with is by having the helper/co-signer own only 1% of the property. This more clearly reflects the true interest in the property. It also helps with land transfer tax. When a property is transferred the government will often charge land transfer tax even when no money is exchanging hands. The tax will be based on the percentage of interest transferred and the value of the outstanding mortgage. Where the “co-signer” has taken only a 1% interest in the property, if there is ever a transfer back, the Land Transfer Tax will be minimal. However, the person helping must understand that he/she will be fully responsible for the mortgage even though he/she holds only a 1% interest in the property. In these circumstances, Independent Legal Advice may have to be obtained by the 1% owner.
The way the control issue can be dealt with is by having the 1% owner give the 99% owner a Power of Attorney so that the real owner can sell the property without the need for the signature of the 1% owner. However, the Power of Attorney can always be revoked and if there is a dispute the 99% owner may then have difficulty dealing with the property.
Another issue to consider is what happens on the death of one of the parties. A Power Of Attorney is of no effect on the death of the donor and would not help in this circumstance. If they take title as 99% and 1% owners as noted above, then they have to take title as “tenants in common”. This means that if the 1% owner dies he cannot have his share pass automatically to the 99% owner. Rather, his/her share will go to his/her estate, which will make it difficult for the “real” owner to obtain full title to the property. To protect the “real” owner, the 1% owner could have a Will drawn up to leave the house to the “real” owner. If they wanted this to happen automatically without a Will, then they would have to take title as joint tenants, but that would require that they each own 50% of the property but that would not really reflect the interests of the parties and would result in more land transfer tax when the property is transferred back.
From the “co-signer’s” or helper's perspective he should know that once he goes on title he will no longer be eligible for any 1st time homebuyer credits. For a purchase in Toronto, that could mean a loss of about $5750 in possible land transfer tax rebates.
2. What is a Guarantor?
Guarantor status more clearly reflects what is really happening when one person helps another with a mortgage. Guarantors, unlike borrowers, do not have to go on title to the property so the issues of ownership do not arise. However, it is more difficult to have someone be just a guarantor as usually the borrowers have to have sufficient income to qualify on their own. What the guarantors have to know is that they are equally and as fully responsible for the mortgage as the real buyer.
So, when one person is helping another get a mortgage as a “co-signor”, it is important that everyone understand what this means, especially if they are borrowers. If these issues have not been considered up front, conflicts and problems could arise on closing. If the parties have concerns about this issue, we suggest they be directed to a lawyer to discuss their options as noted above. The day before closing is not a good time to deal with these issues. Dealing with them early will help us address the issue of front, cover everybody's interests, and have a smooth closing.
Our firm focuses on Real Estate. We have been working with agents and brokers for 15 years and have developed an efficient and responsive Real Estate practice. We also offer fixed purchase closing costs of $999.00* for all Fees & Disbursements, plus Title Insurance. *Plus H.S.T. For details, or with any questions, please feel free to call John Zinati at 416-321-8766, email at firstname.lastname@example.org or visit us at www.zinatikay.com.
Good Luck in the Spring Market !
We wish you success in the spring market. We also remind you that Monday May 20- Victoria Day and Monday July 1- Canada Day are the upcoming holidays to avoid for closings.
Title Tips is not intended and should not be relied on as legal advice. For specific questions or situations, please feel free to call John Zinati for assistance.
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