In Ontario, buying a home with your parents typically involves a co-ownership arrangement where they get added to the property title. When parents go on the title with their child, it can positively impact the borrowing capacity of the primary borrower (their child) due to a combined income and creditworthiness, potentially helping you qualify for a larger mortgage. This may allow the primary borrower to access better mortgage terms and a higher loan amount.
How co-ownership with parents can enhance purchasing power
Let’s consider a scenario where the primary borrower is looking to purchase a home. Their income alone will not meet the requirements to afford the desired property. However, with the addition of the parent’s income and assets, the borrowing capacity increases.
For instance:
- Primary Borrower’s Income: $60,000 per year
- Parents’ Combined Income: $120,000 per year
- Average Home Price: Let’s say the average home price is $600,000
Normally, a lender might use a debt-to-income ratio of, for example, 32%, which means the borrower’s total debt payments (including the new mortgage) shouldn’t exceed 32% of their combined gross income.
With the Primary Borrower’s Income:
-
- Income: $60,000
- Maximum Annual Debt Payment (32% of $60,000): $19,200 per year
- At an assumed mortgage rate and term, this might allow for a mortgage of approximately $300,000 (considering other debts, credit scores, and so on)
With the Primary Borrower and Parents’ Combined Income:
-
- Combined Income: $180,000
- Maximum Annual Debt Payment (32% of $180,000): $57,600 per year
- With this increased income, the borrowing capacity might increase to potentially secure a mortgage of around $450,000 to $500,000 (subject to other factors).
Including the parents’ income and assets significantly boosts the borrowing capacity, making a more expensive home affordable based on the combined income and a stronger financial profile.
However, it’s important to note that this example simplifies the calculations and mortgage qualification process. Lenders assess various factors, including credit scores, existing debts, assets, and other financial obligations, to determine the final mortgage amount and terms. Moreover, co-ownership involves legal and financial considerations such as co-ownership agreements, tax implications, and estate planning.
Before proceeding, consulting with a real estate lawyer, mortgage advisor, or financial planner is highly recommended to understand the legal, financial, and tax implications of co-owning a property with parents and how it affects purchasing power in Ontario, Canada.
