In today’s property market, sometimes it’s necessary to get assistance getting your foot in the door. A common method used is to bring in a co-signer or guarantor to strengthen your loan application. This can improve the income and/or credit score on file. These terms are often used interchangeably. However, there is one key difference between them. A co-signer will be registered as an owner on the title of the property and a borrower on the mortgage. A guarantor will be added to the mortgage registered against the property. However, they have no ownership stake in the title of the property.
Co-Signer
This is where a third party would be assigned ownership of the title and the ownership of the property.
Advantages:
- Ease: Because the co-signer is considered an equal owner of the property and mortgage, almost all lenders are comfortable with this form of third-party assistance.
Disadvantages:
- Credit Reporting: The mortgage payments will appear on your cosigner’s credit bureau, even if they are not paying for the mortgage. This will impact future credit applications until they are no longer on the title of the property, as they will be responsible for the mortgage payment, property taxes, and monthly condo fees on most applications.
- Tax Exposure: With the co-signer being on the title they would be exposed to capital gains if you were to sell the property for a gain before they come off the title. To mitigate this, ensure that the co-signers are only assigned 1% ownership of the property by entering a tenants in common ownership structure.
- Credit Score – A missed payment of the mortgage would result in a negative hit on the co-signers credit bureau.
Guarantor
This is where a third party would guarantee the loan but would not be registered on the title of the property. The guarantor would have no claim to the property. However, they would step in if the primary borrowers were to default on the payment.
Advantages:
- No capital gains exposure for the guarantor: They are not registered to the title. Therefore, have no claim on the capital gains or loss of the property when it is sold.
- The mortgage payment (depending on the lender) and property expenses would not affect a guarantor’s future credit applications
Disadvantages:
- Lack of Availability: Not many lenders offer a true guarantor arrangement.
- Most lenders require that the primary borrowers (people living in the property) can service the loan with their own means. A guarantor is only offered to assist improve credit or strengthen the file.
When thinking of co-signing or acting as a guarantor, it is important to discuss with your mortgage professional and accountant to ensure your bases are covered. Click here to book a meeting to discuss your scenario in more detail.
