With the price of homes rising across the country, it is becoming increasingly challenging for people to get into the housing market. While interest rates remain relatively low, mortgage affordability is still a major stumbling block for many people, particularly in higher priced markets.
One way that many people are getting around this challenge is by leveraging a joint mortgage. Let's look at how joint mortgages work and whether this type of co-ownership might be an option for you.
What Is A Joint Mortgage?
Simply put, a joint mortgage is a mortgage that is taken on by more than one individual person. Most commonly, a joint mortgage is taken on by partners who are married. It can also be taken on by multiple members of a family (like your parents or siblings), a collection of friends or business partners.
A joint mortgage leverages the increased financial well-being of multiple people to mortgage a home or property that wouldn't be attainable by an individual. This is particularly helpful in higher priced housing markets like Toronto, Vancouver and many other large Canadian cities.
Pros Of A Joint Mortgage
One of the biggest benefits of a joint mortgage is the notable jump in mortgage affordability. Mortgage affordability is largely dependent on income, so having multiple people on your "team" when applying for a mortgage can be very advantageous.
The combined income of multiple people not only gets you past a baseline threshold of qualifying for a mortgage, but also affords you the opportunity to qualify for higher loan amounts. This increase in buying power gives you more flexibility when it comes to the price ranges of homes you can look at.
Another perk of the joint mortgage is the ability to increase the down payment amount. While the minimum down payment amount is 5%, increasing this amount is advantageous in a few ways.
A larger down payment increases your loan-to-value ratio and decreases the amount borrowed on which you will be paying interest. It can give you access to lower interest rates. Finally a down payment surpassing 20% allows you to avoid the extra cost of mortgage default insurance which leaves more money in your pocket over the long haul.
Cons of a Joint Mortgage
Because joint mortgages involve multiple people, there's potential for interpersonal conflict to come in the way of the long term investment you are making together. Whether it's the natural ending of a friendship or a divorce, having to negotiate the legalities of a joint mortgage can be tricky.
To the degree that it's possible, it's best to talk through these potential situations before they happen. If you are taking on a joint mortgage with family members or friends, be sure to talk through all potential scenarios including how any of the partners might exit the investment.
Another risk that can cause strife with joint mortgages is when one partner loses income as a result of job loss. The original mortgage arrangement is of course highly dependent on multiple incomes and it can cause stress if one partner is not able to contribute to the mortgage payment.
Again, to the degree possible, it's helpful to prepare for this as much as possible. Perhaps you can develop an emergency fund for the partnership to tap into in this type of situation. If that isn't feasible, it is worthwhile to at least have a conversation early on about selling the home or property as soon as this happens in order to avoid defaulting on payments.
Alternatives To A Joint Mortgage
If finding a long term partner for a joint mortgage is a challenge for your situation, there are a few other alternatives that you can consider. Perhaps the most obvious choice is to wait it out and keep saving your money to the point where you can afford a mortgage single handedly.
Another option is to consider governmental incentives like the Canadian Home Buyers plan where you can withdraw up to $35,000 from your RRSP and put this toward the cost of your first home. This money must be paid back within 15 years, but it gives you the opportunity to have that down payment in hand without having to wait so long to build up a large down payment.
If you are not able to find a long term partner for a joint mortgage, you can consider having a cosigner on your mortgage. A cosigner is essentially in place to bail you out in case you can't make a mortgage payment. You will want to find someone (ideally a family member) who will be sticking close to you for many years to come.
Is A Joint Mortgage Right For You?
A joint mortgage is definitely a great way to get into the housing market sooner than you might be able to if you are on your own. This path offers some great benefits in terms of affordability, lower fees and lower overall payments, but also comes with some challenges in terms of finding the right people to go in with.
If you are considering this path, take some time to do your research. Talk with your partner, friends and family members who might be partnering with you and be clear about expectations.
Never hesitate to reach out to a mortgage specialist too if you have any questions. We are happy to help you through the process of taking advantage of the perks and avoiding some costly difficulties.