Is co-ownership right for you?
With interest rates rising, along with the overall cost of living, more people are turning to creative options to achieve homeownership.
Co-ownership with family or friends—once a very niche segment of the market—is one such option that is growing in popularity.
A recent RE/MAX survey revealed that a third of Canadian homebuyers (33%) are exploring unique options to get their foot in the real estate market, with 13% saying they would consider pooling their finances with friends or family to purchase a home.
While co-ownership can be an effective way to improve your affordability and cut down on housing expenses, it’s a living situation that potential buyers should only consider after being fully informed.
There are two key forms of property registrations that buyers can enter into. The first is a registration known as a Joint Tenants. This is typically used by married or common-law partners or close family members, since ownership of the property is divided equally, and includes the right of survivorship. This means that in the event of death, ownership would pass to the remaining owner or owners, and may pass to the estate of the deceased.
The second is called Tenants in Common. In this arrangement, separate parties can own different percentages of the property. And in the event of death, ownership would pass to that party’s beneficiary based on the percentage of ownership, or be sold to the remaining owner, with the proceeds going to the deceased’s estate.
Below, we explore some of the pros and cons of co-ownership.
The biggest benefits of co-ownership are typically improving affordability or increasing the maximum purchase price for those involved.
The arrangement often makes homeownership possible for those who otherwise would have been priced out of the market, particularly first-time buyers.
Those involved can pool their income and down payment savings to purchase sooner than they could have on their own, or perhaps be able to buy a larger or more desirable property. The savings extend beyond just the purchase cost, as all ongoing expenses are then split between the owners, including the initial land transfer taxes, as well as the monthly mortgage payments, property taxes, repairs and other maintenance costs.
There’s also the added sense of community that appeals to some people, especially those who may have been affected by the so-called “loneliness epidemic” and who thrive on the company of others.
But for most, that’s where the benefits end.
While purchasing a property with a friend or family member may make great financial sense and look good on paper, it can also pose some unique challenges for those involved.
The first hurdle will come at approval time. Not only will your credit score and financial standing need to meet the lender’s criteria, but so too will any other parties that are involved.
Once the application is approved and everyone has moved in, that’s where the real test will begin. It’s not always easy sharing living spaces with others, especially when parties don’t see eye to eye.
There’s always a risk of disagreements over household decisions, including those relating to the mortgage payment and other expenses. One significant disagreement could be enough to sour the entire arrangement.
A potential mitigation to help resolve such differences would be to put in a formal co-ownership agreement that all parties sign prior to removing financing subjects, or at least before the completion date. The agreement would deal with conflict resolution and specify what outs each party has, similar to a shareholders’ agreement for company ownership. Many don’t like to consider what happens if it doesn’t work out, but there are a number of life events to consider, in addition to frustrations, such as divorce, death, etc.
If the situation ever got to the point where you wanted to walk away from the property (or if you suddenly needed to sell for any number of reasons), it could be much more challenging to back out of the deal. Since multiple names are on the property title, you would all need to come to an agreement on the course of action. This could be especially tricky if one party’s decision to sell resulted in a prepayment penalty for everyone.
Another consideration is the impact on your credit score. While you may be diligent and responsible about making your payments each month, if the co-owners ever fail to make their share of the payments, it could negatively impact your credit score and potentially your ability to purchase property or obtain new credit in the near term.
Is joint ownership for you?
We’ve just scratched the surface in terms of the considerations for this form of homeownership. If you or someone you know is considering co-ownership, be sure to contact a mortgage broker who can walk you through the intricacies of such an arrangement and ensure that it makes sense for you.