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For anyone who decides to share their resources to buy a home and apply for a joint mortgage to do so, it’s important that you understand the pros and cons of entering into this type of arrangement before making this commitment.
The Pros of a Joint Mortgage
Combining resources makes it easier to qualify for a property. This is particularly beneficial to anyone who can’t afford a home on their own, either due to credit issues or income deficiencies, or those who simply want to own a bigger property. By combining income of one to four owners, the options will increase accordingly.
Tax benefits may be available, providing that the joint mortgage holders are on title to the property and reside in the home. The advantage is that all borrowers can simultaneously benefit from the income tax rebate, maximizing tax benefits on the home loan. The tax benefit is applicable to the interest repayment amount and the principal repayment amount and is usually capped at a certain level.
There are also advantages when it comes to the property transfer tax, as each owner will have the tax applied according to the value of their percentage of the property. This can end up saving thousands of dollars, as the cap for the property transfer tax is typically 1% on the first $500,000 of but then shifts to 1.5% for the value over that amount. As you can imagine, if there are 3 owners on a property valued at 1.5 million, the property transfer tax will be substantially lower than if one person was being taxed on the entire amount.
The Cons of a Joint Mortgage
Just as combing resources will make it easier to qualify for a property, it’s important that you understand that joint mortgages hold all mortgagors equally responsible for the amount. In some cases, things can go sideways with people for reasons such as loss of job, transfer of job or simply wanting to purchase property with another party. One person may decide to stop making payments or may be continuously late in making payments. This affects the credit history of everyone on the mortgage so it’s important that you trust the people you enter into this agreement with. Consider this type of venture with a spouse, friend or family member, but obtain legal advice separately if you’re unrelated. Have an agreement drawn up that clearly outlines the possibility of someone wanting out of the mortgage. Typically a lender will allow for one person to be removed from the mortgage providing that the remaining borrowers qualify for the loan on their own.
Another possibility is one of the owners wants out is to sell their portion to a new investor, though this can be difficult. Not only will the new investor have to qualify with the lender, they’ll also have to be agreeable to the purchase price of the person who wants out and the terms of their percentage. It may affect the other owners if the new investor is of a personality that gives rise to conflict.
The bottom line is to be aware of these possibilities, discuss them among all parties involved, and draw up an agreement that addresses them. This isn’t to say that alternate arrangements can’t be made, but at least there’s something in place from the beginning.
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