What is a Tenants-in-Common Mortgage?

It’s getting harder for younger Canadians to get into the housing market. The Canadian Real Estate Association finds that the national average price of a home reached $716,585 in October — a 48.7% increase over the past five years. With wages not keeping pace with prices, some are considering co-buying a house with a friend or family member.

Those who go that route could wind up getting what’s called a tenants-in-common mortgage. This type of mortgage is an alternative for those who don’t have a spouse or partner but have a friend who also wants to purchase a home.

Tenants in common and co-ownership explained

Tenants in common are considered co-owners of a property. This could be two young adults, a group of seniors, family members, or anyone for that matter. Each co-owner has a specific share of the property and decision-making power that can be split any way they want (such as 50/50, 60/40, or 50/30/20).

It’s important, however, that the percentage each owner holds is specified on the title. If it isn’t, every tenant in common will be entitled to an equal share of the house.

The ownership structure for a tenants-in-common mortgage can be set up as a group of individuals or as a corporation. Using a corporation can make it easier for co-owners when they sell or transfer their share because the names on the property title won’t need to be changed.

Joint tenancy vs. tenancy in common

With a joint tenancy or traditional mortgage (e.g., you and your spouse buy a home together), each person has an undivided interest in the property and has a right of survivorship, which means the surviving person receives the other’s interest in the property if the other dies. This is common among spouses and common-law partners.

With a tenants-in-common mortgage, however, if one of the tenants in common dies, their share of the property isn’t automatically given to the co-owner(s). Instead, it’s given to the deceased person’s beneficiaries.

It’s possible for co-owners to be joint tenants instead, which can be used to avoid probate fees (which is basically a tax on the value of a deceased person’s estate) and taxes among family members.

What to consider before getting a tenants-in-common mortgage

There are many things you should think about if you want to purchase a property with someone using a tenants-in-common mortgage. Here are just a few:

• Financing and credit scores — If you’re part of a group of purchasers, the lender will blend all your credit scores together. You may be able to leave someone out if their score is low to avoid being charged a higher mortgage rate but still give them co-ownership in a separate legal agreement. If someone misses a payment or defaults on the mortgage, everyone’s credit scores will be affected.
• Ownership setup — You have the choice of being co-owners or having a corporate ownership structure. If it’s the latter, you need to incorporate at the provincial/territorial or federal level and pay a few hundred dollars to do so. You must also create an internal structure and consider drawing up a shareholder agreement.

Setting up a corporation can be complicated so it’s recommended that you seek professional advice. That said, it will be easier for co-owners to sell their respective shares and for new co-owners to join if there’s a corporate ownership structure in place.

• Joint and several liability — If a corporate ownership structure isn’t set up, the co-owners will have a mortgage with joint and several liability, meaning that in the event someone can’t make a payment, everyone is equally responsible for the debt. Lenders will usually take possession of the home in the event of default. It’s advised that the co-owners have a joint account with three months’ worth of mortgage payments to prevent a default from occurring.
• Variable or fixed — While you may expect to live together for years, someone’s situation may change. One of the co-owners may end up getting married, being transferred for work, or decide co-ownership isn’t for them anymore. Choosing a variable-rate mortgage is usually the safer option because of the lower penalties and flexibility it offers. Breaking a fixed-rate mortgage early in the term can lead to a very large penalty.

While it may be tempting to get into the housing market with a friend of group of friends to evade high home prices, make sure you understand the risks involved. Otherwise, you might end up in a situation you weren’t expecting.