Key points:
- Many first-time buyers need help with their first mortgage. This often comes in the form of gifted down payments, or a parent being a guarantor or cosigner
- Cosigning a mortgage means co-owning the property, and a cosigner’s name will be on both the property title and the mortgage
- A guarantor is just supporting a mortgage application, and doesn’t have to co-own the property
- The role of the guarantor is more desirable to parents, but lenders often prefer cosigners
Cosigning vs guaranteeing a mortgage
Today, we discuss the differences between a guarantor and a cosigner on a mortgage. Many first-time home buyers need help securing their first mortgage, and often this comes in the form of a parent acting as a guarantor or cosigner. While the two seem similar at first glance, they have some key differences. Let’s chat about the pros and cons of each, and how they are separate from each other.
Don’t feel like watching? Find the full transcript below!
Chris: [00:00:10] Being a first-time homebuyer in the GTA is hard. Every time you reach for that line, the rope to pull you along on that property ladder, it feels like it just inches a little bit further away out of grasp. And the reality is most first-time homebuyers need help in the form of gifted down payment, which I’ve spoken about in a previous video, and/or having a parent cosign or guarantee the mortgage with them. And in today’s video, I want to talk a little bit about what the differences are between being a cosigner and a guarantor, what the advantages and disadvantages are.
Chris: [00:00:51] There are two ways that a parent can support you with your mortgage application. They can either be included as a cosigner or as a guarantor. And more typically than not, the mortgage lender will prefer them to be a cosigner. So let’s talk a little bit about what the differences are, advantages and disadvantages are, starting with cosigner.
What is a cosigner?
Chris: [00:01:17] So as a cosigner, the critical thing is this: that the cosigner is actually being placed on both the title of the property and also on the mortgage. And that’s significant because they are now being put on title and are co-owning the property with you. Now, how much they own of the property is open to be discussed. They can be as little as a one percent owner in the property. Nonetheless, their name must appear on title. Also by being a cosigner, that individual, your parent, must disclose that they are on title and that they also own this property. And so all associated expenses with the property would have to be disclosed on any future applications, whether it’s for their own mortgage or any other credit application.
Advantages and disadvantages of cosigning
Chris: [00:02:16] So the advantage of being a cosigner is that it’s generally universally accepted by lenders. It’s the preferred way of doing things and there’s no exception required. But there is a disadvantage and the disadvantage is really threefold. So number one, the mortgage payments could prevent your parent cosigner from accessing other sources of credit, because now any future mortgage application would have to disclose the payment of the mortgage, plus property taxes, condo fees, and any other costs associated with that mortgage. Even though they’re not actually making a payment, they still have to disclose it, and it has to be factored in. Also, as a disadvantage, there are tax implications because they are now co-owning the property with you. When you dispose of that property, there’s the potential for capital gains and the way that we mitigate that risk or the major expense of capital gains is by ensuring that your parent cosigner is only a one percent owner of the property to really mitigate that responsibility. And then lastly, if a mortgage payment is missed, well, they’re the cosigner. So it’s ultimately going to impact their credit and they’ll have to step up and make sure that they can cover any missed mortgage payments.
What is a guarantor?
Chris: [00:03:45] Guaranteeing a mortgage is much more desirable for parents because ultimately it means that they do not have to co-own the property with you. They’re not going on title, it’s just them supporting you on the mortgage application. So if we take a look at the advantages, because a parent is not on title, there’s no capital gains implications on the disposition or sale of that property. So that’s definitely a plus, and it’s generally more desirable because it’s less intrusive for your parents. It’s not, they don’t have to disclose the property taxes or condo fees associated with carrying that property. Now, if you take a look at the the disadvantages, the the problem with being a guarantor is that not every lender will accept guarantors. It’s really done on a case by case basis. And so we have to present the case to the lender to ensure that a guarantor can be added. If not, the lender in most cases will insist that the the guarantor become a cosigner. And then lastly, the guarantor is still providing a guarantee to the lender that should the borrower default, they will assume responsibility for the debt. I mean, that’s really what it means to be a guarantor, that you’re supporting whoever is signing for the mortgage and will stand up if payment cannot be made.
Chris: [00:05:20] If you found some value in today’s video, just trying to understand that subtle difference between cosigners and guarantors. If you do have any questions about your specific circumstances, I’m here to help. My name is Chris Molder. I am a Toronto-based mortgage broker and the door is always open to you. So feel free to send me an email, send me a DM and I’ll be sure to reply. Looking forward to hearing from you. Bye for now.
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