Canada’s has more accidental millionaires per capita than just about any other country, all thanks to real estate gains.
People buy a home, prices go up, they parlay those gains into buying bigger homes, their bigger home leads to faster equity appreciation and the cycle continues. Barring occasional corrections – like the one we just had – real estate has been on this cycle for decades.
Regardless of one’s views on the sustainability of that cycle, the fact is that countless Canadians are desperate to get on the real estate ladder – but can’t.
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On Thursday, Canada Mortgage and Housing Corporation projected that “affordability will continue to deteriorate through 2023.”
Meanwhile, “affordability challenges in home ownership will keep many households in the rental market,” CMHC adds, making renting more expensive. Canadians who need a home and don’t have well-off parents to help are getting squeezed from two directions. These folks need economically viable housing solutions, and fast.
One such answer is co-ownership, and more Canadians may have to consider it.
How it works
Co-ownership is essentially two people, who are not spouses/partners, buying a home together to split the costs.
And those costs are significant. Assuming CREA’s national average home price of $686,371, a 4.29-per-cent, five-year fixed mortgage rate and 25-year amortization, we’re talking a $43,637 minimum down payment and monthly mortgage payments of $3,622.
Purchase with an equal co-buyer and these numbers can be halved to a $21,819 down payment and monthly mortgage payments of $1,811.
Of course, you’ll need to add utilities, insurance and condo fees, if any, and adjust these ballpark numbers based on the real estate market you’re in.
The potential upside
If the home above escalates in value over five years at CREA’s long-term appreciation rate – 5.87 per cent per year – that’s roughly $226,530 of tax-free equity gains over a five-year mortgage term.
On top of that is the forced savings mortgagors get from paying down their principal. Of that $1,811 payment above, more than $600 a month would go toward principal, thus building additional equity.
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If these theoretical co-buyers then sold after five years, each could use their share of the proceeds – $141,223 after 5 per cent realtor fees – as a down payment to buy their own home.
That is the end game – building equity to buy your own place and getting off the rental hamster wheel.
The risks
Despite the cost savings and potential upside, only 1 per cent of Canadians live in a jointly-owned home with roommates, according to a recent TD survey.
Committing to a hefty mortgage with a friend or acquaintance, let alone stranger, sounds risky, and it can be.
Conflicts can occur owing to differences of opinion on late or missed payments, property maintenance, cleanliness, noise, guest use, how to manage unexpected expenses and how, when and at what price to sell.
It’s imperative that co-buyers are like-minded, be candid with each other about their finances and lifestyles, and have an ironclad lawyer-prepared co-ownership agreement.
The biggest risks are when one party wants to sell and the other doesn’t, or when one homeowner isn’t pulling their weight financially – perhaps because of job loss. Things get especially dicey if the home value has dropped such that there’s not enough equity to sell and come out whole.
This is where emergency savings and proper contractual incentives and procedures come into play. While beyond the scope of this story, lawyers can address most such risks with proper contingency planning.
Co-ownership expert and lawyer, Ryan Martin at Aura LLP, says each party can take various measures to protect themselves. Those may include putting slush funds in escrow if one party defaults or if there are unforeseen costs, adding monetary penalties for defaults, inserting a right-of-first refusal if one party wishes to sell, or potentially even including a “shotgun clause” – compelling a homeowner to either sell their stake or buy out your share if they default. Albeit, laws in some provinces may limit some of these measures, he says.
By the way, in a case where both parties are on the mortgage, one wants to exit the arrangement and the other wants to keep the home, the mortgage would have to be refinanced. Fortunately, this is typically doable if the borrowers qualify.
If the mortgage is default-insured and meets standard CMHC guidelines, the insurer lets you add a new co-borrower to the loan and use the mortgage proceeds to pay out the old co-buyer. The key is that you need a minimum of 5 per cent to 7.5 per cent equity, the new co-signor must be qualified, and any new mortgage funds can only be used to pay off your old co-owner’s equity share.
Where to find a co-buyer
Countless individuals are looking to share living expenses. You can often find them among your friends, workmates, acquaintances, existing roommates, non-immediate family or even websites. Husmates.com is one such site that matches up compatible co-buyers.
Remember that each party to a mortgage is jointly responsible for the whole thing, so before committing yourself find a co-owner with strong credit (720-plus credit score), a track record of stable and provable income, modest debt, and some degree of liquid assets in addition to their down payment and closing cost funds.
At all costs, avoid with someone with unstable finances.
Ultimately, there’s a way to make co-ownership work and manage the risks. Pooling resources is therefore a legitimate way to start building net worth in real estate when you can’t buy on your own and have no better options.
With our governments’ housing and immigration policies being bullish for home values, and with home prices down from their peak, it’s a solution worth exploring.
The calm before the Fed
Short-term mortgage rates took a turn for the worse this week. The lowest nationally-advertised uninsured two- and three-year fixed offers increased by 20 and 15 basis points, respectively. (One basis point is one-hundredth of a percentage point.)
Apart from this, it was a quiet week in the rate market as lenders await the critical U.S. Federal Reserve rate announcement on May 3 that could alter the direction of interest yields for weeks to come, depending on how worried the Fed seems about inflation. And yes, Fed policy has a major effect on Canadian mortgage rates – mainly because it moves our bond yields, which affect lenders’ capital costs.
For those of you buying or refinancing in the next four months, it’s generally smart to secure a no-cost rate hold sooner than later. Even though seemingly everyone and their dog expects lower inflation and lower rates by year-end, that doesn’t mean rates can’t jump in the interim.
Rates are as of April 27, 2023 from providers that advertise rates online and lend in at least nine provinces. Insured rates apply to those buying with less than a 20 per cent down payment, or those switching a pre-existing insured mortgage to a new lender. Uninsured rates apply to refinances and purchases over $1-million and may include applicable lender rate premiums. For providers whose rates vary by province, their highest rate is shown.
Robert McLister is an interest rate analyst, mortgage strategist and editor of MortgageLogic.news. You can follow him on Twitter at @RobMcLister.
