Co-Signing a Mortgage: Guarantors and Co-Borrowers Explained

If your income, credit or savings fall a little short, a parent or another close relative may be able to help by signing the mortgage with you. Here is the difference between a co-borrower and a guarantor, what lenders and insurers ask for, and what signing means for both of you, including your first-time buyer benefits.

The short version

Co-borrower or guarantor?

People say "co-signer" for both, but lenders treat them differently.

• A co-borrower applies with you, usually goes on title as an owner, and signs the mortgage. Their income, debts and credit become part of the application. Sagen, one of Canada's mortgage insurers, requires everyone on title to be on the mortgage and liable for the entire amount.
• A guarantor signs a promise to pay the mortgage if you don't. Canada Guaranty, another insurer, describes a guarantor as someone who promises to pay the mortgage loan but is not on title, so they don't own any part of the home.

Which one your lender asks for depends on its rules and your application. Settle it before anyone signs, because the choice affects ownership, taxes and your first-time buyer exemption.

What lenders and insurers look for

With less than 20% down, you will typically need mortgage default insurance, and the insurer's rules apply as well as the lender's. Here is what two of the insurers publish:

• Close family only. Sagen accepts guarantors, and co-borrowers who won't live in the home, only if they are a parent, child, brother, sister, grandparent, legal guardian or legal dependent. Canada Guaranty's list for guarantors also includes grandchildren.
• Their debts count. Both include a guarantor's debts in the debt service ratios, and Canada Guaranty expects a guarantor to add credit and financial strength to the application.
• Verified income and credit. Sagen expects lenders to verify each borrower's and guarantor's income. For a CMHC-insured mortgage, at least one borrower or guarantor needs a credit score of 600 or more.
• A guarantee that holds up. Guarantees must be valid and enforceable if you default, and must continue through any amendment or renewal of the mortgage.

With 20% or more down, you don't need default insurance, and lenders set their own rules, so ask yours what it needs.

What signing means for the co-signer

Signing makes you legally responsible for the debt. A co-borrower is liable for the whole mortgage, not just a share, so the lender can ask any one borrower for the full amount owing, and a guarantor promises to pay if the borrower doesn't. In practice:

• You can be asked to pay. If the buyer misses payments, the lender can look to you. If the home is sold by court order for less than is owed, the lender can generally pursue the borrowers for the difference, and a guarantee covers the debt too.
• It can show on your credit. The loan can appear on your credit report, so missed payments can hurt your credit as well as the buyer's. If you plan to borrow yourself, ask a mortgage professional how lenders will count it.
• You have a right to information. At a bank or other federally regulated lender, every joint borrower is entitled to the cost disclosure and the same statements the others receive, unless all of you agree that only one gets them. If you are a guarantor, ask the lender what it will send you.
• Tax on your share. If you are on title, you own part of the home. A family can designate only one home as its principal residence for each year, so if you designate your own home, your share of any gain on this one can be taxable when it is sold. Ask an accountant.
• Speculation and vacancy tax. In areas where it applies, every owner on title declares each year by March 31. A parent whose adult child lives in the home can generally qualify for an exemption, since a family member living there for at least six months of the year counts, rent or no rent.

How you hold title also decides what happens to a co-borrower's share on death. I explain the options in Joint Tenancy or Tenants in Common?

First-time buyer programs, for both of you

Each program looks at each person separately. If you are the first-time buyer and your co-signer isn't:

• Property transfer tax. BC's first-time buyers' exemption applies only to the share owned by qualifying buyers who move in. If a parent who owns a home goes on title with 50%, the exemption is halved: on an $800,000 home, the tax rises from $6,000 to $10,000. A guarantor isn't on title, so the exemption isn't reduced.
• Your federal programs. You can still use your First Home Savings Account, the Home Buyers' Plan and the federal home buyers' amount if you qualify. Your co-signer generally can't use theirs for this home unless they also meet each program's first-time buyer test and will live in it, and two owners who both qualify share the $10,000 home buyers' amount.
• The co-signer's own future. The federal programs ask whether you lived in a home you or your spouse owned, and BC's exemption asks whether you have ever owned a property that was your principal residence. A co-signer who never lives in the home may still count as a first-time buyer later, but confirm it before relying on it.
• A 30-year amortization. For a CMHC-insured mortgage, at least one borrower must be a first-time homebuyer, or the home newly built, so a parent co-borrower who owns a home doesn't stop you from getting 30 years.

Independent legal advice

Sagen tells lenders to consider provincial law when making sure a guarantee is enforceable, including giving guarantors the opportunity to get independent legal advice. That means meeting a lawyer who acts only for the co-signer, not for you or the lender, to go through the documents. It is a good time to ask:

• What can the lender claim from me, and when?
• Does my promise continue through renewals, and how would I be released?
• If I go on title, what share will I own, and what are the tax effects?

It also helps to put your family's own arrangement in writing: who makes the payments, whether the co-signer owns a share, and when they expect to come off.

Coming off the mortgage later

Co-signing doesn't end on its own when your income grows. To remove a co-signer:

• The lender has to agree. Canada Guaranty, for example, allows a release when there have been no arrears in the past 12 months, the mortgage terms haven't changed, and the remaining borrowers are of at least comparable quality and meet the lender's guidelines. Expect to qualify on your own, or with a new co-borrower.
• A share on title has to be transferred. A lawyer or notary prepares and registers the transfer, and property transfer tax applies to the share unless an exemption does. A parent's share passing to a child can be exempt as a transfer of a principal residence between related individuals, if the home has been the principal residence of either of them for at least six months immediately before the transfer and other conditions are met. Brothers and sisters don't count as related individuals for this exemption.
• Timing. If removing the co-signer means refinancing before your term ends, a closed mortgage normally carries a prepayment penalty, so your renewal date can be the simplest moment.

Alternatives to co-signing

• A gifted down payment. A gift from close family that doesn't have to be repaid can count toward your down payment, and the giver doesn't go on title or the mortgage. I explain what lenders need in Gifted Down Payments in Canada.
• A home with a suite. Lenders can count rent from a suite when you qualify. See Buying a Home with a Suite.
• Time. Paying down debts, building your credit or saving a larger down payment can raise what you qualify for on your own.

Questions buyers often ask me

What is the difference between a co-signer and a guarantor on a mortgage?

A co-borrower, often called a co-signer, usually goes on title and signs the mortgage as a borrower. A guarantor promises to pay the mortgage if you don't, but isn't on title. Both are legally responsible for the debt.

Does co-signing a mortgage affect my credit?

It can. You are legally responsible for the mortgage, it can appear on your credit report, and missed payments can hurt your credit as well as the buyer's.

Can my parents co-sign if they already own a home?

Yes, if they meet the lender's and insurer's rules. If they go on title, your first-time buyers' property transfer tax exemption covers only your share; as guarantors, they aren't on title, so it isn't reduced.

Can a co-signer be removed from a mortgage later?

Usually, with the lender's approval. You will generally need to qualify without them, and if they are on title, their share has to be transferred, with property transfer tax unless an exemption applies.

Does a guarantor need independent legal advice?

It is a good idea, and Sagen, one of the mortgage insurers, expects lenders to give guarantors the opportunity to get it. A lawyer acting only for the guarantor explains what they are signing and the risks.

Getting help from family? Read Gifted Down Payments in Canada, Joint Tenancy or Tenants in Common? and How Much House Can You Afford?

This article is general information, not legal, tax or financial advice. Lender and insurer rules come from their published guidelines, vary from lender to lender, and were current at the time of writing. For the Financial Consumer Agency of Canada's guide, see disclosure of information to joint borrowers.