The cost of home prices in Toronto has people looking for innovative ways to get their foot on the first rung of that real estate ladder. That includes taking the cohabitation/co-buying route. In this scenario, people purchase a home with friends and live in the home together. If you are considering buying a home with friends, here’s what you need to know.
What is Co-Buying?
Co-buying is purchasing a property with an unrelated party. This can be a friend or family member, or in rarer cases, an associate of some kind. It is a complex approach to home ownership, but can be agreeable if you plan things out properly.
How Does Co-Buying Work?
There are two ways to co-own a home. The first is as joint tenants, which is the same premise as buying a home with a spouse or common-law partner. In this scenario, each person owns interest in the property. Should someone die, their share of the property goes to the remaining owners. The second is tenants-in-common. In this case, co-owners own a portion of the property but when someone dies, the portion owned goes to the estate of that person. In other words, it becomes part of the property divided in their will. In both scenarios, all owners are named on the mortgage, and there can only be a single lender for the property.
Qualifying for a Mortgage with Co-Buyers
Although buying with others helps alleviate the burden of carrying a mortgage alone, you might find it doesn’t increase your odds of qualifying for a mortgage. This is because lenders “blend” your credit scores and income when considering mortgage approval. Therefore be sure you are going into this with friends who are financially sound and responsible.
Mortgage Payments and Agreements
Because there is a single mortgage for the property, all parties are 100% liable for mortgage payments. If your co-owner(s) default on their mortgage payments, it affects your credit score. As well, you might face foreclosure even if you’ve been making your share of the payments on time. Because you or a co-buyer might want out of the ownership, you need to consider the penalties involved to break your mortgage early. In most cases you’ll find a variable-rate mortgage tends to have more flexibility which can make these situations a little easier to manage.
How to Define the Agreement
Co-buying situations definitely call for a legally drawn-up agreement designed to avoid complications including:
- Whether or not owners have the right to rent out their part of the home
- How to proceed if an owner wants to sell the home
- Whether or not owners can have a non-owner share their space
- Covering maintenance of the home both financially and physically
- The percentage each party owns
- How you split-up utilities
- How taking out mortgages/loans on a share of the home would work
A lawyer who understands the possible worst case scenarios for this type of agreement will know exactly what to include in the contract.
While co-buying a home with friends can lead to home ownership, it’s important to understand the pros and cons. If you are considering buying a home with friends, I’m here to help. Reach out to me today. For more information on Co-Ownership check out this blog.
Photo by Chang Duong on Unsplash
