No Good Deed Goes Unpunished - Mortgage Stress Tests and the bank of Mom & Dad
If you have applied for a mortgage or line of credit in the past two years, you may have noticed that it has become much harder to qualify. The much-publicized “stress test” is making it increasingly difficult for some individuals buying or refinancing property. With the heightened requirements, we are now seeing an uptick in the number of co-signors being required by the banks. For many, this means “mom and dad.” Below are a few items to that both purchaser and “guarantor” should be aware of before they sign on the bottom line.
Land transfer tax
Qualifying first time home buyers are eligible to receive a credit up to $4000 off of land transfer tax on closing. However, if you have a co-signor who is not a first time buyer, the amount of the credit you are entitled to can be reduced proportionally based on your ownership stake. If a lender requires that you be a joint tenant with your co-signer on title, it effectively means the maximum credit you will now receive in the form of a rebate is $2000. You will need to be mindful of this when factoring your budget.
The ‘One Percenters’
Most co-signors will seek to have the smallest ownership stake possible with the aim that they will (in the near future) transfer their stake back to the primary owner. But beware that the lender’s written consent will be required in order for that to happen. This can trigger additional land transfer tax and registration costs for the primary owner at the time of the subsequent transfer.
It also comes with an even bigger surprise: despite being on title at one percent, a co-signor is 100% liable for the full amount of the mortgage. In the event of a default, the bank can elect who they pursue - and it generally is the person with the deepest pockets. Being responsible for the mortgage can also adversely affect your ability to buy other property, vehicles, or even appliances on credit. Anyone performing a credit check on you will see that you are liable for the full amount of the mortgage, regardless of what your ownership stake is. If you have plans to purchase or refinance your own property in the near future, helping out your son or daughter by coming on title for them can often mean your hands are tied from a credit perspective.
Be aware of what you are agreeing to before you sign on and remember that no good deed goes unpunished!