Guest Speaker: Ben Sammut
Mortgage Broker at Mortgage Gate
This episode is about Shared Ownership from the mortgage broker’s point of view. As housing prices in Toronto climb, we have to find creative solutions to home ownership. I’m a big advocate of friends buying houses together.
- Recommendations for people contemplating on sharing a property with a friend, a stranger, or anyone else
- The benefits to combining incomes on paper
- Do the parties have to share their intimate financials with each other?
- What if one party loses their job? Or becomes ill, how does the mortgage get paid?
- What if one of the partners wants out of the ownership?
- The structure of mortgage payments if the partners aren’t equal
- How would it work if one partner has more money than another partner?
- How much would the 2 parties have to put down as a downpayment if the house was less than $1 million? What about over $1 million?
- Purchasing a duplex with a legal basement apartment
- What happens if that basement apartment is not legal? How does that affect financing?
- What if the partners need to do renovations to create 2 separate spaces in the house? How can they finance those renovations?
- What if they have a renter in a third unit?
- Should they form a corporation in order to buy a place together?
Davelle: Welcome to The Morrison Report. I wanted to created a podcast that would give people insights into the Toronto real estate market. You can follow me on Twitter @davellemorrison, and on Instagram as Davelle Morrison, and you can “like” my business page on Facebook.
Joining us today is Ben Sammut. He’s a mortgage broker with Mortgage Gate. Thank you so much for joining us today, Ben. Welcome.
Ben: Hi, thank you.
Davelle: Awesome. So today, we’re going to talk a little bit about shared ownership from the mortgage broker’s point of view. As housing prices in Toronto climb, we always have to try to find more creative solutions to home ownership. I’m a big advocate of friends buying homes together.
So Ben, can you tell us, if someone was contemplating sharing a property with a friend, a stranger, anyone really, what would you recommend they do first?
Ben: This might sound a little bit self-serving, but I usually recommend getting pre-approved first. As long as they know what their limits are, they can always play within that space, and then they’re not being a little bit misguided when they’re going out looking for the right property.
Davelle: Sure. That totally makes sense. Are there benefits to combining incomes on paper?
Ben: Well obviously, the more income that you have, the more you would qualify for in terms of mortgage, theoretically. Having said that though, it really does come down to the individual.
So if, for example, someone brings a lot of income to the table but they also carry a lot of debt, or they have bad credit and they’re actually doing more harm than good, then it might not make sense to include them in the application or in the process. But for the most part, yeah, the more income the more mortgage.
Davelle: Got it. That’s cool. So, do the parties have to share their, sort of, intimate financials with each other? I know that would be a big concern for people.
Ben: It does depend on the process. We usually try to keep parties as separate and as individual as we can throughout the process. Having said that though, legally at the end of the transaction, all parties need to sign off on the application that was submitted on their behalf. So there is a final document that would show a summary of their assets, liabilities, credit scores, and so on, so that way they can see what was submitted to the bank on their behalf was accurate and there was no fraud committed for them.
So there is some information you’ve shared, but usually when you’re going in on a transaction like this with somebody, there has to be a little bit of trust that they won’t just go scheming through your details.
Davelle: Got it. Let’s say if somebody buys a property together with somebody, what happens if one party loses their job, or becomes ill? How does the mortgage get paid?
Ben: So that’s really going to boil down to the contingency plans that you put in place. We usually recommend speaking with individual lawyers so that way you can have a co-habitation agreement. And then that agreement would dictate anything in the event of a loss of job, or if someone passes away or gets sick, or decides to leave, how the wealth will be redistributed, or if there’s a way for someone to cover a payment, or if there’s penalties such as an NSF charge, for example. There’s multiple ways to approach that, but it’s all going to come down to what you put in your own individual co-hab agreement.
Davelle: Got it. And then what if one partner wants out of the agreement? What they want out of the house, basically?
Ben: That’s also going to certainly be a contingency that you would put into it. Usually you would see first rights of of refusal for the other parties. Some agreements will allow for people to have a say in who gets to buy them out. Or usually, if one party wants out, a more popular option is to just mutually sell and then part ways.
Davelle: Got it. Okay. That makes sense. And then, how would the mortgage payments be structured if the partners aren’t necessarily equal? Let’s say if it’s a 60-40 split, or a 70-30, or if it … I guess if it’s 50-50 it’s easier. But if it’s a different kind of a split, how do the mortgage payments work?
Ben: There’s a difference between the client’s perspective versus the bank’s perspective. So for the bank, they’re just taking one payment out of one account. However you want to structure that on the back end, though, is again entirely up to all parties involved. So if you wanted to have a 70-30, 50-50 split, whatever it may be, usually we recommend getting a separate joint account for all parties, and then that way each person can contribute their own amount that’s required, and then one combined payment would come out from there.
Davelle: Okay, perfect. Yeah. That definitely seems to make a lot of sense for sure. And so, how would it work if one partner has more money than the other partner?
Ben: There’s a few ways to approach that. Usually, the reason why you’re co-purchasing to begin with, that can vary. So if you both come in with a down payment and the ability to pay the mortgage, usually you’re not going to see much of a difference.
But let’s say, for example, one person has a high income but no savings, and the other person has savings for the down payment but no income, sometimes it comes out in the wash and you still just share it 50-50. Or other times, you’ll see it where because someone was able to contribute more of a down payment, they might take on more ownership or have a larger liability on the mortgage payment side. That’s more addressed individually, but there’s a multitude of ways to actually approach that.
Davelle: Got it. Okay. And then how much would the two parties have to put down as a down payment if the house was less than a million dollars, and then if it was over a million dollars?
Ben: So under the million, as long as everyone’s going to be residing in the property, you can put the minimum down payment. So we usually call that either 5 percent or a modified five. So if you are under 500 thousand, you can put as little as 5 percent down. And moving upwards from there, between 500 thousand and a million, you can still put the minimum, which would be 5 percent of the first 500 thousand, and then 10 percent of the remainder. So usually a maximum of seven and a half percent down.
Davelle: Got it. Okay. And then if it was over a million?
Ben: And then once you break the million mark, once you’re over a million it’s automatically 20 percent is required. Once you get into much larger, around two million and above, then it becomes a sliding scale. But we usually approach that individually once we’ve got a group.
Davelle: Got it. Yeah, that definitely makes sense, for sure. You had mentioned something about as long as both people are residing in the house, the minimum is 5 percent. So let’s say one person’s going to live in the house and the other person isn’t going to live in the house and they’re just going to rent out their portion, how would that change the down payment structure?
Ben: At that point, it becomes a judgment call for the banks. So if it can be argued that the residence is still used as a principal residence for at least one of the parties, then most of the time the banks will be a little bit lax and they’ll still allow for that minimum down payment.
But if it starts to become obvious that it’s just a rental property or it’s just an investment, that’s first of all going to change the down payment, but it’ll also change the qualification process, and they might even see a premium on their rate. Nothing too drastic, but it will change the mortgage that they’re going to be applying for.
Davelle: Okay, got it. And what happens if they purchase a duplex that has a legal basement apartment? How does that work in terms of approvals, payments, et cetera?
Ben: So from the qualification standpoint, they can use the rental income, so there’s no problems with that; it just adds to the qualification amount. And then in terms of actually splitting the rental income, depending on the co-hab agreement, they will either have … one party has the rights to this amount, the other has the rights to this amount. Or they might actually just take that extra monthly payment from rent and then put it towards paying down their mortgage faster, and that’s just a collective effort.
Davelle: Okay. Perfect.
Ben: But again, that all comes down to the co-hab agreement.
Davelle: Got it. And then what if the basement apartment is not legal? How does that affect the financing?
Ben: On the financing side, you can’t actually use the income to qualify, but it definitely still helps with the monthly budget. So it might not change your appetite for the specific property, but again, you have to qualify using only your employment income.
Davelle: Got it, okay. That makes sense. And what if the partners need to do renovations to create two separate spaces in the house? How can those renovations be financed?
Ben: There’s actually two ways to do that. One is through CMAC’s “Purchase Plus Improvement” program, and there’s a mouthful. But essentially, what it allows you to do is once your mortgage the property, you can increase the value of the property up until the 10 percent, and then borrow against that future value. So those extra funds can go towards renovations.
The program does have its downsides. It’s usually a shortened timeframe and it is subjective to the judgment call of CMAC on whatever projects you’re trying. Having said that, because you can put less of a down payment down, usually if the clients are a little bit more flush with cash, we recommend just shrinking their down payment and then just using the extra funds to do the renovations themselves.
Davelle: Mmm. Got it, right. That makes sense. And then, we might have covered this earlier with the basement apartment, but what if they have a renter in a third unit?
Ben: As long as they’re still going to be residing in the property, it’s still considered a principal residence. You’re allowed to by a property with a basement suite or a duplex with a second unit that you’re renting.
Ben: So that won’t really change that at all. It comes down to once you have a contingency plan, if anybody wants out or if you wish to sell, you then have to account for the tenants as well and how they’re going to be treated.
Davelle: Mmm. Got it. Right, right, right. And then, do you think that they should be forming a corporation to buy a place together?
Ben: Contrary to popular wisdom, I wouldn’t advise it. Everyone usually tries to buy assets in the name of a corporation and it does make sense. The only roadblock that you would hit, though, is that the majority of banks and lenders don’t actually allow for holding co’s to own the property. They only want to the put the mortgage in the names of the individuals.
So unless you have someone who has very specific tax reasons or they’re just a savvy individual, I usually advise staying away the corporation because the only way to get the financing in the name of the corporation is to go through usually a higher interest rate with fees.
Davelle: Mmm. Interesting. And what if they do like a personal guarantee or something on that corporation?
Ben: Yeah, even in that case, surprisingly, even with personal covenant, banks will only allow for the actual physical names on title. They still don’t like to see a hold-co.
Davelle: Got it. Yeah. No, it’s funny because with so many … I guess you’re right. People out there that say, “Oh, you’ve got to put it in the name of a corporation.”
Ben: And it makes sense financially, but banks just don’t like that for some reason.
Davelle: Interesting. And have you seen more people trying to do the shared ownership given the way that the market’s going in Toronto in terms of housing prices?
Ben: Yeah, I’ve definitely seen it increase in popularity. I think it’s always been fairly common to see sort of parents helping, maybe, a child and their spouse. So intergenerational wealth you’ve seen for the longest time. But now people are really getting into the concept of two families that might want to just buy a house with a fenced yard because they like the school zone, they like the neighborhood with mature trees.
You might also see downsizers or retirees that are just looking to get into a communal space with someone that just has similar lifestyles. So people are really starting to embrace this now, especially with where prices have gone. It’s just another tool to get into the market.
Davelle: Yeah, of course. Absolutely. For sure. I feel like more people need to embrace it because it might be the only way for a lot of people to get into the market.
Ben: Absolutely. And it’s not for everybody, but for the right buyers it makes perfect sense and it’s a fantastic opportunity.
Davelle: Absolutely. Is there anything else you think my listeners should know about doing a shared ownership from a mortgage standpoint?
Ben: From a financing standpoint? Not really. It is actually a little bit more simple than most people expect. You’re going to rely heavily on lawyers for something like this. But at the same time, we all work as a team. So between your realtor, your lawyer, and your mortgage broker, we’re all going to make sure that you’ve got everything you need.
Davelle: Perfect. That sounds good. Thanks so much for joining us. How can my listeners reach you if they have any questions? Where can they find you?
Ben: You can email me at ben-sammut-at-mortgagegate-dot-ca. It’s a bit of a mouthful, so I’m allow Davelle to spell it out. Or you can always reach me on my cell at 647-518-4669. I also host several social media feeds as well. You can find me on Facebook and Instagram at The Millennial Mortgage Program.
Davelle: Cool. Awesome. That sounds great. Thanks so much for joining us today, Ben.
Ben: My pleasure. Thanks, Davelle.
Davelle: Thanks again for joining us for some Toronto real estate market insights. You can visit my website at morrison-sells-real-estate-dot-com, or visit morrison-talks-real-estate-dot-com for more episodes of the podcast. Thanks for listening.