What does it mean to co-sign a mortgage?
Jordann Brown
This piece was first published on November 16, 2020, and was updated on March 11, 2024.
Quick facts:
- A rising stress test and mortgage rates have made it increasingly difficult to qualify for a mortgage.
- Mortgage co-signers take on part of the mortgage and home purchase, and are responsible for the loan in case the primary borrower fails to make payments.
- Mortgage co-signing is usually reserved for borrowers who have poor credit, and need considerable help to qualify for a home loan.
It’s no secret that it’s becoming increasingly difficult to afford Canadian real estate. Home prices have generally been on an upward trajectory over the past 15 years, and this only became more prevalent during the pandemic, when the national average clocked in above $800,000 in early 2022.
While this has corrected somewhat since the Bank of Canada started hiking, borrowing conditions have only worsened for would-be buyers due to a tougher mortgage stress test and rising rates. This was especially pronounced in 2023, when buying conditions deteriorated in all of Canada’s 10 major markets, according to data compiled by Ratehub.
As Canadian homes become less affordable, homebuyers are finding it increasingly hard to be able to buy their ideal home. This lack of affordability is often made worse by other factors, such as low cash flow, temporary employment or a lack of credit history.
In these cases, a third party can step in and provide security for the loan, addressing lender concerns about the primary borrower being unable to pay it back. This practice is called co-signing, and is available on a variety of loans, including mortgages.
What is co-signing a mortgage?
When you co-sign a mortgage, you’re promising to pay the monthly mortgage payments if the primary borrower can’t. You essentially become the co-borrower, and you take on partial responsibility for the mortgage. Co-signing a mortgage is a big risk for the co-signer, so it mostly happens between family members. For instance, parents might co-sign for their children, adult children can co-sign for retired parents or siblings may co-sign for each other.
When would a mortgage applicant need a co-signer?
Historically, co-signing a mortgage was used when borrowers had poor credit. The two most common examples would be a new graduate with either poor credit or a short employment history. In this case, a co-signer was required for a first-time home purchase. Another example would be a borrower who has had trouble making payments on loans in the past, which has damaged their credit history.
Also read: How your credit score affects your mortgage
In today’s real estate market, even if you are able to get the best mortgage rate on offer, there are still good reasons to co-sign a mortgage. Sky-high home prices, rapidly rising rates, the elevated stress test, low wage growth and strict lending criteria can all leave potential buyers short of what they need to secure a purchase. A co-signer adds their financial weight to an application, allowing the primary borrower to qualify for a mortgage they otherwise couldn’t obtain.
Should you co-sign a mortgage?
Think carefully before committing to co-sign on a loan. In most cases, co-signing on a loan makes you a co-borrower, which means you’re buying the home alongside the primary borrower. Being a co-borrower means you’ll be responsible for the loan if the primary borrower defaults. This is a huge responsibility, and is the reason why most co-signing is limited to parent-child relationships.
Other people in your life may approach you about co-signing on a loan, and you should think very carefully before agreeing. Remember, you’re never under any obligation to co-sign on a loan. If you have any concerns about whether the primary borrower can make their mortgage payments on time, you should address them up front.
Can you co-sign a mortgage?
Beyond whether you should co-sign a mortgage, also consider whether you can. As a co-signer, your finances will be under the microscope just as much as the primary borrower’s. That means your income, debt and credit score will all be scrutinized by the lender to determine if you’re able to pay off the loan. If you have a high debt load, bad credit or no income, you generally won’t be considered a candidate to co-sign a mortgage. You will also need to pass the mortgage stress test, which requires borrowers to prove they could afford their mortgage payments if their rate was 2% higher.
What makes a good co-signer?
Income and credit history are the most important things that mortgage providers will look for when considering a co-signer. While your co-signer having a high net worth or lots of home equity might help, your lender will mostly care that they can make your payments for you if you’re not able to. The most important indicators for that are your co-signer’s regular income and their credit score, which indicates their overall creditworthiness.
What’s the difference between a co-signer vs guarantor?
A co-signer and a guarantor are similar, in that they both see a third party adding their weight to a mortgage application. However, there are a few crucial differences between a co-signer and a guarantor.
A mortgage co-signer
When you co-sign on a mortgage you become a co-borrower, similar to how you might buy a home with a spouse or partner. Both credit histories are considered, and the income of both applicants is used to secure the loan. The co-signer is part owner of the home, and the lender will hold the co-signer responsible if the primary borrower can’t make their monthly mortgage payments.
Co-signers tend to be used when the primary applicant has serious credit issues, and would not receive approval for a loan without a co-signer.
A mortgage guarantor
A guarantor, on the other hand, vouches for the primary lender and guarantees the loan in the event the primary borrower defaults, but does not share in the title of the home. Guarantors are less common than co-signers.
Mortgage guarantors are generally used when the primary applicant has a reasonable income and credit profile but needs a little help to be approved for a better mortgage. The guarantor is thus less likely to be relied upon.
Co-signed mortgages vs. joint mortgages
It’s also worth noting the differences between a co-signed mortgage and a joint mortgage. While a co-signer can own a stake in the home, it’s a more arm’s length arrangement. A joint mortgage on the other hand typically involves some level of co-habitation, such as when live-in partners buy a home together (although this isn’t always the case).
Things to do when you co-sign a mortgage
Co-signing a mortgage is a big responsibility, and could cause you financial harm if the primary borrower defaults. For this reason, it’s important to do your due diligence. Here’s what you should do when you become a mortgage co-signer in Canada.
- Get copies of the paperwork: Read everything before signing, and keep copies of the paperwork for your records.
- Require access to mortgage account information: Since late payments will affect your credit score, it’s important to ensure the mortgage is paid on time every month.
- Get insurance: Talk to the primary borrower about obtaining mortgage life insurance – or suitable term life insurance – to cover the debt in the case of death or disability.
- Understand the legal side of things: Your taxes and estate may be impacted by becoming a co-signer. Make sure to speak with a real estate lawyer to fully understand the implications of such an undertaking.
Should you get a co-signer for your mortgage?
If you’re looking to purchase a home and have any of the circumstances above that make it difficult to obtain a mortgage, consider all aspects of your finances before using a co-signer. Consider why you were denied for a mortgage in the first place: Is it because you have too much debt, or a history of defaulting on loans? If this is the case, take steps to fix these problems before leaping into homeownership.
To avoid the need for a co-signer, you might want to reconsider what mortgage you can actually afford. Use our mortgage affordability calculator to determine how much you can afford to pay every month, and work backwards from there.
If you’re being denied a mortgage on other grounds, such as not having had time to establish a credit history yet, a co-signer could be a good way to move forward with your home purchase.
The bottom line
Co-signing on a loan is a significant financial risk, so you should consider the implications carefully before moving forward. Make sure you have complete confidence in the primary borrower, and that you can manage if they can’t make their monthly mortgage payments. If you’re looking to recruit a co-signer on your mortgage, consider how much you’re actually asking of them, and whether there’s a better way to afford the home you want. As long as both parties take their time in making a decision, co-signing can often be the helping hand a family needs to afford the home of their dreams.
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