With the cost of properties soaring in certain markets, a greater number of family members are stepping in to help their own get their mortgage. One way they’re doing this is by becoming either a guarantor or co-signor.
It’s a common misconception that both are one and the same, but there are very distinct and important differences. While guarantors and co-signors are commonly used to help otherwise ineligible borrowers qualify for a mortgage, that’s where most similarities end.
The best way to think of a co-signor is someone who co-owns a home with the person living in it. They’re typically required because the primary borrower doesn’t have the income to qualify for the mortgage on their own.
Co-signors assume an equal portion of the mortgage liability as the primary borrower, their name appears on all of the mortgage documents and they are registered on the title. Most importantly, they have an equal responsibility in ensuring that the payments are made.
On that point, even though it’s generally understood that the co-signor will not be contributing towards the monthly payments (unless they’re a spouse, for example), their income and/or assets can be at risk in the event that the primary borrower defaults.
Other points of note:
- Co-signors usually have equal rights to the property, but not always. Technically, co-signors can own just 1% of a property, depending on the lender (not all lenders allow this).
- A co-signor may not be able to claim any tax benefits from the mortgage, such as interest deduction, unless they are also contributing to the actual mortgage payments. Consult a licensed tax advisor to confirm this in your case.
- If a co-signor dies, the liability for the mortgage then transfers to his or her estate.
- In 2014 the Canadian Mortgage & Housing Corporation implemented a new rule restricting mortgage insurance availability to only one property. That means if you already have a CMHC-insured property, you could not co-sign for a borrower who would also require CMHC mortgage insurance (e.g., when that borrower is buying a home with less than a 20% down payment).
- For young buyers using parental co-signors, it may sometimes make sense for the parents to go on title as 1% owners instead of 50/50. That way, the buyer may get more of any applicable first-time homebuyers rebates and the parents aren’t on the hook as much when it comes to capital gains upon sale.
A guarantor is also used to help a primary borrower. However, in this case the primary borrower usually has the income to support the mortgage but may have credit issues that prevent them from securing the loan on their own.
A guarantor doesn’t have the same property rights as a co-signor since their name is only on the mortgage and not on the title of the property. Their role is strictly to guarantee that the mortgage payments can be made in order to get mortgage approval.
Unlike a co-signor, the guarantor typically becomes liable for default only after the lender has exhausted all other means of collection against the primary borrower.
Guarantors are typically in better financial standing than the primary borrower and, because they don’t own any stake in the home, generally assist out of compassion (i.e. a parent helping out an adult child).
- A small number of lenders permit guarantor income from immediate family members to be considered for the calculation of debt service ratios
- Many lenders do not allow guarantors unless they are the primary borrower’s spouse
- Professionals sometimes prefer to be guarantors to protect their home from litigants.
Co-signing or guaranteeing a mortgage loan should never be taken lightly. But it’s also not a life sentence. Generally once the primary borrower has had a chance to become more stable and improve his or her financial situation, both parties can request that the lender reconsider the application and remove the co-signor/guarantor from the loan.
Now, keep in mind there may be fees involved with this. Your lender could also consider it breaking the mortgage if it’s done before maturity, in which case a penalty may apply. So make sure the terms are clear if your guarantor wants out early.
In the event the co-signor or guarantor does need to be removed from the mortgage and the primary borrower still isn’t in a position to go it alone, the borrower can apply for refinancing at a “B” (a.k.a. non-prime) lender. That assumes they have enough equity. A non-prime lender has more flexible qualification requirements. Although that additional flexibility also comes with a higher interest rate.
Dear readers: Please note, the information above is not legal or financial advice. Check with a licensed professional to confirm the legal implications and if/how this information might apply to your case.