More Canadians are turning to non-married co-ownership to combat the high prices, prohibitive interest rates and low supply that torpedo affordability for so many home buyers.
According to an August survey by real estate brokerage Royal LePage, 6% percent of Canadian homeowners — roughly 1.6 million people — co-own a property with someone other than a significant other. Over 30% of the company’s agents say they have seen an increase in non-married co-ownership compared to pre-COVID times.
The logic behind property co-ownership seems sound. More buyers should mean a larger, more advantageous down payment. Multiple incomes can make a mortgage easier for borrowers to manage and less risky for lenders to sign off on — theoretically, at least.
But risks still exist for co-owners. Disagreements over money can poison once-strong relationships, while new opportunities or unexpected setbacks can put owners on divergent paths.
Mitigating these risks is possible, though. It just takes a little planning and a commitment to candid communication.
Get it in writing
No matter how well you know your potential buying partners, you’ll want to put a legally binding co-ownership agreement in place before getting too far along in the process.
A co-ownership agreement isn’t intended to govern relationships or dictate day-to-day decisions, says Max Cohen, senior partner at Cohen LLP in Toronto. Instead, it should be considered a tool for setting expectations and resolving potential issues in the future.
Cohen, a property co-owner himself, rarely consults the co-ownership agreements he’s entered into with his kids or investing partners. They usually make their decisions around the dinner table.
“When the relationship and the communication breaks down, that’s when the agreement matters,” Cohen says. “So a successful agreement is one where everybody says, ‘Okay, what if our relationship no longer works? What do we want to have happen then?'”
Your co-ownership agreement should be drafted with the help of a lawyer and cover certain elements, such as:
- Ownership structure: Who owns what share of the property? How will future equity be determined and distributed?
- Financial contribution: Who’s providing the down payment? How will they recoup their investment if the property is sold?
- Future capital expenditures: Who’s responsible for paying for renovations, bills or other costs related to the property?
- Liquidity provisions: What’s the plan if one or more owners want to sell but the others don’t?
- Decision-making mechanisms: How will decisions about the property be made? Will all co-owners have an equal say?
Cohen says more distant co-ownership relationships, like those between groups of unrelated property investors launching a joint venture, tend to require more detailed co-ownership agreements.
“As you get further out, then I think that co-ownership agreement becomes much more important in terms of setting mutual expectations and creating mechanisms that allow for governance, decision making and possibly dispute resolution and liquidity,” he says.
Commit to communicating
Owning a property with friends, family or business partners may be the easy part, says Karen Yolevski, chief operating officer at Royal LePage Corporate Brokerage. The real challenge is when multiple owners decide to live together.
A co-ownership agreement can only anticipate so much, so expect issues to bubble up that haven’t been planned for. Friction could arise from people not doing their chores, overuse of shared space or disputes over who gets the big bedroom.
If communication in the home is clear, ongoing and kind, these obstacles can be easier to manage. But not all relationships foster that kind of dialogue. That’s why Yolevski urges home buyers to think carefully about whether they’re choosing the right people to take the plunge with.
“‘Is this someone that I get along with? Is this someone that I’m worried is going to leave me in the lurch?’ You want to ask yourself those hard questions, because these things can really harm friendships if they don’t turn out appropriately. Same for family. You don’t want to create family rifts through things like money or division of labour,” she says.
Understand the nuances of financing
Let’s say your co-ownership agreement is solid. You’ve assessed your property partner and made a pledge to always be civil. Great. There’s still the tiny matter of paying for the house.
Pouring all of your co-ownership group’s savings into a down payment might sound like an obvious move. Anthony Venuto, mortgage broker at Centum InTouch Mortgage Solutions in Vaughan, Ontario, says otherwise, particularly if down payment contributions are used to determine ownership percentages.
“Usually what I would like to do is qualify them with the least amount possible, so each person is coming in with an equal share,” he says. “This way, all the parties together feel like they’ve contributed the same amount and there’s no animosity.”
Venuto says making a larger down payment might be preferable if the added capital is needed to qualify the buyers for a mortgage.
When lenders qualify a co-ownership group, they examine each member’s debt, income and credit score. Venuto says particular attention might be paid to those with the highest income. Even if they have the weakest credit of the group, the highest earner’s credit score may still be used to determine the loan amount and interest rate you’ll be offered.
Some lenders assess a group’s debt servicing ratios as a whole. This can benefit co-borrowers with outsized debt loads who may otherwise not be able to secure a mortgage. But lenders will only assume so much risk. If someone in your co-ownership group’s credit falls well short of a bank’s minimum qualification guidelines, you may be asked to remove them from the co-ownership covenant altogether.
If one of the co-owners decides to leave the partnership in the middle of a mortgage term, Venuto says the group is responsible for notifying their lender, who may need to refinance the mortgage and requalify the borrowers. In this scenario, the group is not only exposed to the risk of higher mortgage rates and less favourable terms; they may also find themselves on the hook for prepayment penalties.
This is exactly why thoughtful planning and clear communication are so important. Aligning your group’s goals, desires and time horizons, and using that information to inform a co-ownership agreement, can save your relationships — and your money.