For most people, the pursuit of homeownership is a journey worth taking, but the requirements for making it to the finish line can prove difficult. This holds true during normal circumstances but, in the midst of a global pandemic, the process has become even more onerous.
Home prices in Canada have swelled 22% over the past year with the median home price at an all-time high. Supply and demand are still out of balance, interest rates remain low and intense bidding wars have become routine. Further exacerbating the situation are stricter lending standards, rising costs of living and high personal debt levels, leaving many wondering whether their dream of homeownership is out of reach.
Amidst this declining affordability, one in three Canadians is exploring alternative options to traditional financing including an opportunity to share costs and living space with family or friends.
Co-owning real estate allows people to enter the housing market without the burden of going it alone. Pooling finances means individuals don’t have to struggle with producing a single down payment and a combined – and presumably larger amount – will help reduce the size of the mortgage and, consequently, the monthly payments. Increasing purchasing power will also boost the odds of obtaining final mortgage approval and increase the likelihood of securing a higher loan. A joint mortgage may also lead to a lower interest rate and better terms. Other benefits include sharing ongoing costs such as monthly bills, property taxes, and maintenance, repair and renovation expenses.
A special contract or co-ownership agreement should be prepared by a real estate lawyer and will include considerations such as ownership percentage, division of expenses in proportion to ownership interest as well as how much and for what each individual is responsible.
Caveats
While the concept may be appealing, sharing one of life’s largest financial commitments requires comprehensive collaboration and unwavering commitment from everyone involved. For starters, each individual is required to demonstrate financial viability and qualify for the mortgage. Lenders will take individual and joint financial circumstances into consideration when determining how much the group may borrow, and at what rate.
Delving into income, credit scores and debt service ratios for each individual could be cumbersome in terms of time, workload and documentation. And although there is some security with multiple participants paying into the mortgage, there’s also the risk of possible life events such as job loss, work relocation, marriage, illness or even a return to school, which would require someone to break their commitment, and leave the others to make up the difference. Any payment delinquency or default will affect everyone involved, now and into the future.
It’s important, therefore, to have a contractual contingency plan in place that will formally summarize what happens when one party is no longer able to afford their payments, when they no longer want to live in the joint home or are forced to move out. Life is unpredictable at the best of times, so it’s important to fully understand the implications if something goes awry or there’s a falling out.
Joint ownership facilitates affordability and represents a viable path to homeownership, but it’s not a decision to be taken lightly. It’s important to gain a thorough understanding of the financial and logistical complexities involved, and how to avoid potential pitfalls and implement solutions should problems arise. Daily contact with housemates in shared spaces may also affect relationships over time so setting respectful boundaries and keeping communication channels open will help avoid friction and result in a harmonious home.
Have questions about co-ownership? Answers are a call or email away!