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Should you seek out the help of a mortgage co-signer? Parents are becoming increasingly involved in the purchasing process for their children, particularly as mortgage co-signers. Before you decide whether this is the right path for you, take some time to learn how this duty works, and the risks associated with it!
How do parents help their children buy a home?
Historically, the most common way parents would help their children purchase a property is through a gifted down payment. As the name suggests, this means parents provide the down payment on a property for their child. Saving a down payment can be a big hurdle for many home buyers, and it can take a long time to build up the necessary funds. When parents step in, this clears a large obstacle. You can learn more about gifted down payments here.
More recently, parents are becoming even more involved in helping their children buy a home. They can become loan guarantors or mortgage co-signers. A loan guarantor is responsible for ensuring mortgage payments are made, but they are not actually listed on the lease. A co-signer is listed on the property title and is also held responsible for mortgage payments. Failure to make these payments has a larger impact on co-signers than guarantors.
Why co-signers are growing in popularity
Mortgage co-signers in particular are becoming more common. Canadian home buyers usually have to pass the stress test. This ensures they can support mortgage payments up to two percentage points higher than current rates, in case of rate hikes. Since interest rates are already so high, many Canadians are struggling to pass this test. The stress test benchmark is around eight per cent right now. When parents become co-signers, their income is included in the mortgage application, which boosts the chances of securing a mortgage approval. Lenders have more assurance that the home owner can make their payments when there are co-signers as well. In many cases, parents don’t need to actually support mortgage payments for their children. They are co-signing just to help them pass the stress test and secure their property.
What do you need to keep in mind?
While it sounds like a win-win situation for children to have their parents come on as mortgage co-signers, there are some items to consider. First, parents can either sign on as joint tenants or tenants in common. Joint tenants mean there is no clear division of who owns how much of the property. However, a tenancy in common agreement assigns each party a fraction of homeownership. Generally, a joint tenancy is best, because it limits the complications associated with having multiple controlling owners of the property. Second, parents who co-sign might need to take this into consideration come tax filing time, and also during their everyday lives. Since this mortgage application is under their name as well, parents will be affected if they wish to apply for new credit for themselves during this period.
Get a mortgage broker involved
If you think a mortgage co-signer is something you want to consider, it’s very important to get in touch with a mortgage broker first! We can meet with you and your potential co-signers to discuss what this situation would look like for everybody, and ensure everyone understands their responsibilities. This is a big step for parents as well as home buyers, which is why it requires a lot of preparation.
Mortgage co-signers can be great solutions for home buyers, but it’s important to do your research so you can make the most responsible decision. If you have any questions about your mortgage, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.