With a hot real estate market and rising property prices (especially in major cities) it’s becoming increasingly harder for Canadians to afford to buy a home. Buying a house together with someone else using a a tenants-in-common mortgage could be a smart solution. Read on to see if it’s the right option for you.
» MORE: How does a mortgage work?
What is a tenants-in-common mortgage?
A tenancy-in-common mortgage is when two or more people (or corporations) take out a loan together to buy a property as co-owners.
Unlike joint tenancy, where each party owns an equal share of the property, tenancy-in-common allows each party to have a different ownership share. For example, two people could each own 25% of the property and a third person could own the remaining 50%. Likewise, each person can pay a different portion of the mortgage based on their ownership percentage.
All parties to the tenancy-in-common mortgage agreement must be listed on the property title and sign the mortgage, and each co-owner is fully responsible for the mortgage. Furthermore, each co-owner can sell their share of the property whenever they want unless there are seller restrictions set out in a separate ownership agreement.
Tenants-in-common vs. joint tenancy
The main two differences are that, with tenants-in-common, there is no right of survivorship among the co-owners of the property and, secondly, each owner doesn’t necessarily own equal shares of the property.
When does a tenants-in-common mortgage make sense?
A tenants-in-common mortgage might make sense if two or more friends decide that they want to buy a home together because they can’t afford one on their own. Ownership shares in the home could be dependent on what each person is able to pay towards a down payment and the monthly mortgage.
A tenants-in-common mortgage arrangement is also a good option for non-family members or those not romantically linked who want to share the cost of buying a house. This is true because there is no right of survivorship, meaning that if one of the co-owners dies, his or her share of the property goes to their estate (and thus their heirs) rather than to the other owners. Separate agreements could be made to cover things like housing costs and what happens in the event one co-owner passes away.
» MORE: How much mortgage can I afford?
How a tenants-in-common mortgage works
The tenants-in-common mortgage process is similar to that of any other mortgage. Potential mortgage lenders will verify that all parties who intend to sign the mortgage contract are creditworthy and can afford to make mortgage payments, likely by making sure they pass the mortgage stress test. Lenders will consider the same factors as they do when looking at any mortgage applicant, including, income, debts, and credit reports and scores.
Mortgage lenders will also require that all people on the home’s title sign the mortgage. However, it will be up to all the co-owners to decide how mortgage payments will be made and how much each person will be responsible for. That’s why when going into a tenants-in-common situation it’s smart to work out an agreement in advance and put it in writing so that everyone knows their monetary responsibilities. To ensure the agreement is legally binding, it might be wise to get professional advice and contracts drawn up by a lawyer. While you may be friends with each co-owner at the time you get a mortgage, life (and financial) situations can change, so it’s good to have a binding agreement that sets out everyone’s responsibilities.
Note also that each member of a tenants-in-common agreement can unilaterally decide to leave the agreement by forcing a sale of their share in the property.
Finally, know that there is no right of survivorship with a tenants-in-common agreement. That means if one member of the agreement dies, their ownership rights do not immediately and automatically go to the other owners (as they do with a joint tenancy arrangement). Rather, the deceased owner’s share goes to their estate and can then be distributed according to their will.
Pros and cons of a tenants-in-common mortgage
- Sharing the responsibilities and cost of a property among many owners can make home ownership more attainable.
- Each owner can leave their share of the property in their will to whomever they want.
- If relationships devolve or a co-owner is irresponsible with their mortgage payments, it could place a significant financial burden on the others.
- Individual owners have no control over what the other owners do with their share of the property.
Alternatives to a tenants-in-common mortgage
One alternative to a tenants-in-common agreement is to consider joint tenancy, which is where each person owns an equal share of a property, with a right of survivorship. If you believe you would not get approved for a mortgage on your own, another option is to get someone to co-sign your mortgage.