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Pros and Cons of Joint Mortgages
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Purchasing a house in Canada, whether you live in a big city or a smaller town has increasingly become more and more expensive. As homeownership is no longer a reality for many younger Canadians, it’s unsurprising the joint mortgage has gained popularity.
What is a Joint Mortgage?
As you might guess, a joint mortgage is a mortgage that you take out with another person (or multiple individuals). In this scenario, you would apply for a home loan together and assume all responsibilities of the mortgage contract. The most common situation that involves a joint mortgage is when spouses or partners buy a house together. But friends or investment partners may also get into this type of agreement. In this case, both or all names of the parties involved are on title.
Joint mortgages are typically entered into in an effort to increase the odds of mortgage qualification. Considering how high home prices are these days, some people may not necessarily be able to get approved for a mortgage alone, and instead may need another person’s income to help secure the home loan. Not only that, but homebuyers also use joint mortgages to get lower interest rates and better terms on a home loan contract as a result of a higher combined income, or to take advantage of one borrower’s better credit score and financial health.
Certainly, joint mortgages can be very helpful for many borrowers. But there are also some potential drawbacks that all borrowers should know about before entering a joint mortgage with another person.
Pros of Joint Mortgages
Let’s take a look at some of the benefits of joint mortgages that may prompt you to consider one.
Increased odds of mortgage approval. As already mentioned, a combined income between two or three people can make it easier for mortgage approval. Of course, income is a key factor in a person’s ability to get approved for a mortgage, and if one person’s income isn’t adequate enough to afford a certain home, combining the income with another individual can help boost the odds of approval.
Higher loan amounts approved for. Not only can you increase your odds of mortgage approval, but you may also be able to afford a higher home price and therefore secure a higher loan amount to finance the purchase. Entering into a joint mortgage can increase your buying power and give you more freedom when it comes to the price range you can look at.
Smaller down payment. A down payment is required to secure a mortgage, and the lowest down payment amount that is typically required is 5% of the purchase price of a home. But while you may be eligible for a down payment that small, you would be better off putting down a much higher percentage of the purchase price. This will help you minimize your loan-to-value ratio (LTV) and therefore reduce the amount you owe your lender.
Not only that, but a larger down payment can also help you secure a lower interest rate thanks to the lower risk for the lender. Finally, putting down at least 20%, if possible, will allow you to avoid having to pay mortgage default insurance, which will require you to pay more for your mortgage overall.
Shared maintenance. Taking care of a home takes a lot of time, effort, and money. If you can share these responsibilities, then you won’t have to shoulder the burden entirely on your own. All the maintenance and repairs that are required can be shared, as can all the utility bills. This will give you some peace of mind knowing that you’re not on your own with these responsibilities.
Cons of Joint Mortgages
Along with the advantages of joint mortgages, there are also some drawbacks that you should consider.
A falling out may occur between joint partners. Whether you’re married to the person you’re in a joint mortgage with or are just friends looking to take advantage of the benefits that this type of arrangement can afford, it’s always possible for you both to cut ties with each other for whatever reason. It could be a divorce, a break-up, or just an end to a friendship. Whatever the reason may be for your falling out, such a situation could make it difficult, if not impossible, to remain in this situation. If the home needs to be sold as a result, you could find yourself dealing with a sticky situation.
One person wants out. If one partner in a joint mortgage no longer wants any part of the home while the other one still does, this could pose a problem. Either the interested party must come up with the difference in equity to maintain the home on their own, or the home must be sold in order to give the uninterested party their share of the equity.
Learn more about the spousal buyout of a mortgage.
One person loses their job. The original arrangement is dependent on both parties maintaining an adequate income to be able to afford the combined mortgage. But if one person loses their job, this could be a major issue when it comes to continuing to pay the mortgage on time. If the other person who is still employed cannot afford to cover the other person’s portion of the mortgage, the house may need to be sold in order to avoid mortgage default.
Is a Joint Mortgage The Right Option For You?
|Joint Mortgage||Non-Joint Mortgage|
|Mortgage payments||A joint mortgage may provide more affordable payments as it is spread between you and your partner.||With one income stream, payments can feel more expensive, because you can’t share the cost.|
|Down-payment||With two incomes, you can afford to put a larger down payment.||With a single income, your down payment will be less than what you could provide with a partner.|
|House responsibility||Maintenance, upkeep, and general responsibilities that come with owning a house can be shared.||All expenses involved in owning a house will fall on your shoulders.|
|Fewer Fees||Due to your ability to provide a larger down payment, your mortgage default insurance premium will be smaller or nonexistent.||With a smaller down payment, your mortgage default insurance premium will be bigger.|
|Better Rate||With two incomes, you’ll look less risky and be more likely to receive a better rate.||Considering all other things equal, a single income may lead to higher rates being charged.|
Joint Mortgage Alternatives
If you’re concerned that a joint mortgage might be the right option for you but you can’t afford to become a homeowner on your own, there a few additional options you may want to consider.
Wait and Save Up a Larger Down Payment
While this may delay your purchase of a house by several years, if you can’t afford a mortgage payment on your own, you should think about saving up a larger down payment. A large down payment will not only make your mortgage payments more affordable but a down payment of 20% or more will guarantee that you won’t have to pay default mortgage insurance.
Look Into The First-Time Home Buyer Incentive
The Home Buyers’ Plan (HBP) allows Canadian consumers, who are purchasing or building their first home, to withdraw up to $35,000 from their RRSPs to put toward the cost of the home. Participants must be first time home buyers and repay the money within 15 years.
Consider Getting a Cosigner
If you want to purchase a house on your own and be the only official owner, you can consider asking a family member or friend to cosign your mortgage. It will increase your borrowing power while still allowing you to be the only owner. Just keep in mind that a cosigner will be required to make a payment if you do not, this is why choosing someone close to you is important.
What About an Income Property?
While this is not allowed in all cities, purchasing a house with the option to rent out part of it to create an income can help certain borrowers afford more expensive homes. Some lenders will approved mortgage applications based on the borrower’s ability to earn an income with the property.
If you’re interested in applying for a joint mortgage or any other type of mortgage or loan product, Loans Canada can help. We’ll put you in touch with the right lender who can offer you the type of loan product you need and can qualify for.
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