Personal Finance

If you and a non-spouse buy a home together, you'll need a formal ownership agreement.
By Deanne Gage | 05/10/15

A person who cannot afford to buy a home at today's prices is left with two options: keep renting and saving for that down payment, or learn to be happy with renting for life. But what about a third option: buying a property with a friend or family member?

About the Author
Deanne Gage is a Toronto-based writer who has specialized in personal-finance issues since 1999. A recipient of several journalism awards, including one from the Investment Funds Institute of Canada, she is also a former editor of Advisor's Edge and Advisor.ca. She can be reached at deannegage@gmail.com.

Here's the rationale: pooling your money to buy a property makes things more affordable. Or you can qualify for a bigger mortgage because there are two incomes.

"We are definitely seeing this trend where affordability is an issue," says Tina Tehranchian, branch manager and senior financial planner at Assante Capital Management in Richmond Hill, Ont.

But before taking the leap into property ownership with a non-spouse, figure out if it's truly worth pursuing. "Most people go into such an arrangement with the best of intentions but unfortunately, they do not formalize their relationship," Tehranchian says. "There's a lot of assumptions on both sides and that's what can usually cause friction down the road."

Sharing a mortgage with a non-spouse can make it harder to qualify for other loans, Tehranchian notes. "As two individual people, you are both responsible for the entire mortgage payments. That makes your individual debt-to-income ratio higher," she says. "So if you need to get a loan to buy a car or a secondary property, it can work against you."

If friends or family members decide to buy a home together, step one is to recognize this is not just a cohabitation arrangement but also a business partnership, Tehranchian says. That means conducting due diligence such as checking each other's credit history, as well as taking stock of each party's income and assets. "Then you will have a clear idea of the financial situation of your partner," she says. "Remember, while your partner may have the best of intentions, if your partner misses payments it can ruin your credit record too."

The next step is drawing up a written formal agreement that is vetted by both partners' respective lawyers. "You need to clarify the expectations and look at all the things that could go wrong and come to an agreement to protect yourself," says Rhonda Sherwood, a wealth advisor at ScotiaMcLeod Ltd. in Vancouver.

She says an agreement helps to solve issues that can come up throughout the life of the mortgage. "Usually conflict arises when someone else enters the picture, namely a spouse," she says.

Sometimes, one partner wants to sell the property before the other is ready. For example, Chloe and Sandy are two friends who buy a condo together. But less than two years later, Chloe wants to sell the condo because she's getting married next year. She wants to buy a new property with her new fiancé and cannot afford to do so and keep the condo with Sandy. Sandy, on other hand, cannot afford to buy out Chloe's share. If the two women had an agreement, it could set up specific instructions on how to handle this situation, Sherwood says.

Another possible conflict is what happens if one homeowner dies. In the case of a married couple, for example, the property would pass to the surviving spouse. This would not necessarily be the case with friends or other family members, especially if only one partner is listed on the title of the mortgage.

"I've seen situations where people buy a property together but because they are siblings they decide to buy it in one person's name," says Tehranchian. "It becomes really messy when the unexpected happens. It can ruin relationships between family members and friends."

Sherwood says both partners need to draft a will that stipulates what happens to each share of the property. One partner, for example, may want their share of the property to pass to a family member instead. That could bring its own share of issues if the family member doesn't want the property and chooses to sell instead. Another smart estate-planning move is for both partners to take out life insurance on each other so the mortgage is covered, she adds.

Disability and job loss is another factor few partners plan for, which is surprising in this economy, Tehranchian says. "The bank does not care who has a job and who doesn't," she says. "As far as the financial institution is concerned, you have to pay your mortgage payment and the onus falls on both parties."

If the partners are buying the property for strictly investment purposes, there's even more things to consider such as whether to rent out the property or live there, how much to charge and who is responsible for maintaining the property.

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