Thinking about buying a house with friends? Here's what to consider
A real estate lawyer and mortgage broker sound in on the basics of co-ownership
On July 1, the Canada Mortgage and Housing Corp (CMHC) changed the rules around mortgage insurance, making it more difficult for some would-be buyers to qualify for a CMHC-backed loan. And despite the early impact of COVID-19 on housing values, prices bounced back in May and June and remain relatively high. According to a recent Canadian Real Estate Association report, homes in Canada sold for an average of almost $539,000 in June, and of course much more in cities like Toronto and Vancouver.
It's no wonder some Canadians are considering co-ownership to get into the market or move into a more desirable property or location. But if living with family can be complicated, co-buying with an unrelated party (a friend, for example) is even more complex and could benefit from expert guidance.
We reached out to Dalia Barsoum, president of Woodbridge, Ont.-based Streetwise Mortgages, and Richard Bell, partner at Bell Alliance LLP in Vancouver, to find out how a co-ownership arrangement might differ from a typical purchase. If you're interested in the idea, here's what to consider before buying property with a friend or two.
Choose a co-ownership type
You can co-own a home as joint tenants (similar to a married couple buying a home together) or tenants-in-common. (Usually, the term tenant describes a person who rents or leases property. For an estate owned by more than one person, however, a tenant is a co-owner.) With joint tenancy, each person has an interest in the investment, and if one owner dies their share of the home goes to the other owner(s). In a tenants-in-common arrangement, each tenant owns a portion of the property, which becomes part of their estate when they die. Whether registering as joint tenants or tenants-in-common, all owners on the title will need to sign any mortgage, and there can only be one lender, notes Bell. Barsoum points out that from a lender's standpoint, every co-owner is 100 per cent liable for the mortgage. So if one buyer defaults or forgets to make a payment, everyone's credit scores will be negatively impacted.
Agree on the fine print
What if someone wants to rent out their place? What happens when one person wants to sell? These are the types of questions you should review with potential co-owners and attempt to answer in any co-ownership agreement. "When you're doing contracts, you're always trying to ask what scenarios can arise and what do you do if things go wrong?" says Bell. "What is the contractual arrangement between the parties?"
Any agreement should also specify the percentage each person has, which — if you aren't splitting ownership equally — Bell suggests could be calculated based on factors such as square footage and livability differences between each unit, assuming there are separate spaces. If one unit will use more municipal services, for example, a different ratio might make sense.
Beware you may face lending challenges
When working with co-buyers, Barsoum will typically look at each person's finances before recommending how any deal should be structured. "Sometimes having everyone on title complicates the deal from a financing standpoint and may result in suboptimal financing for the group," she says. "When two or three people come together [to buy a property], they may be all making money and bringing more income to the table to improve their qualification, but they are maybe also bringing their own debts into the equation." Buyers' credit stores will be blended, she explains. If one individual's score is very low it might affect approval or the type of financing the group gets.
In those situations, it might make more sense to exclude one buyer from the property title. Their interest in the co-ownership can be protected through a separate legal agreement. However, Barsoum notes that some lenders don't care how the title of a property is split up, whereas others may want everyone to have equal ownership depending on who's on the application.
Whether or not the parties are related, there are two situations where it may be harder to get approval: when investors want to buy a rental property together and when it's a larger group of people making the purchase. "Whenever multiple people are going on an application, lenders generally want to know the story," says Barsoum. "Why are [these] people coming together to buy? And the story has to make sense." Bell notes that, in his experience, financing can also be a challenge for a tenants-in-common arrangement.
Look for a mortgage with flexibility
Co-buyers might expect to spend several years living together, but individual circumstances may change sooner than that. "Life happens … someone gets married or has a new job or needs to change location [and] they want out," says Barsoum. "If they have taken a fixed-rate mortgage, then there is going to be a [larger] penalty." Barsoum recommends variable-rate mortgages for clients who are getting into co-ownership arrangements because they offer more flexibility and generally have smaller penalties if you need to break your mortgage early.
Don't forget about government programs for homebuyers
Programs such as the First-Time Home Buyer Incentive can be invaluable. Barsoum notes first-time buyers — whether purchasing with friends, family or a spouse — would be able to benefit from the incentive on their share of the property, even if co-buyers do not qualify.
Truc Nguyen is a Toronto-based writer, editor and stylist. Follow her at @trucnguyen.