Don’t co-sign a mortgage

Jennifer is a widowed parent in her early 50s living in Saskatoon. She works as a high school teacher, her house is paid off, and she has $900,000 in registered and open investments, as well as a defined-benefit pension. Her son Tyler graduated from the University of Regina with a computer science degree and immediately landed a six-figure tech job. He bought his first home, a $420,000 detached in Saskatoon, six months later. Jennifer helped Tyler with a 20% down payment so he wouldn’t have to get mortgage insurance. When Tyler couldn’t qualify for a mortgage due to his outstanding student and car loans, she co-signed.

The problem

Tyler lost his job in a wave of layoffs. When Jennifer expressed concern about his financial situation, Tyler assured her he was handling things. But then, Jennifer received a demand letter for the arrears on the mortgage.

Jennifer didn’t investigate the legal implications before she co-signed. Laura Parsons, area manager for mortgage specialists at Bank of Montreal, says this happens often.

“Co-signers are responsible for the full balance owing plus any arrears and the full amount becomes part of their credit profile. They think they’re just helping the primary holder qualify, but in reality, as co-signer they’re responsible for everything, including any condo fees, insurance and taxes. If a mortgage goes into arrears, it could have a negative impact on the co-signer’s credit rating.”

Tyler had a $336,000 mortgage with a five-year variable closed repayment plan of about $1,055 biweekly (as of April 2015). He has a variable mortgage at 2.85% with a 15-year amortization. His annual property taxes are about $3,500.

The dangers of co-signing

Parents often co-sign mortgages without realizing the legal implications. Here are some things you need to know:

• A co-signer assumes the same legal responsibility as the primary mortgage holder for the mortgage, legal fees, taxes and insurance
• The debt becomes part of the co-signer’s credit report and must be disclosed on subsequent credit applications
• A co-signer should seek independent legal advice. Draft a separate agreement with steps to take in the event of a divorce or other significant change
• All parties must agree beforehand if they will sell the house to cover any arrears; however, the co-signer has the legal right to go to court to force a sale
• Parents sometimes give a down payment for a house as a wedding gift to their children. That down payment then becomes part of the child’s family assets and value of the house. If the child’s marriage fails, the parents have no legal right to receive the down payment back
• As co-signer, you have a legal right to know whether the mortgage is up-to-date, and can request copies of the statements and other correspondence. This way you won’t be blindsided with a demand letter if the loan falls into arrears

He was four months behind when the bank notified Jennifer, and owes about $8,400 and counting. Tyler received several notices, but was too embarrassed to tell his mother, not realizing she would be held financially responsible.

He’s been making partial payments on all his debts, reasoning that something is better than nothing, but hadn’t asked the bank for mercy.

Had Tyler gotten mortgage insurance, his insurers could have helped him with the arrears. However, an insurer can go after the mortgage holder and any co-signers for shortfalls at any time, regardless of whether the house has been sold.

“Insurers have a default program,” says Parsons. “We know a single mom who went on arrears and the insurers helped her renovate the basement so she could rent it.”

The solution

Jennifer didn’t realize she had a right to ongoing details about the mortgage’s status. She should immediately contact the bank to have all mortgage correspondence directed to her and to discuss a repayment strategy.

“There is a misconception that banks will foreclose if you tell them you’re in trouble. But there’s not much we haven’t heard before,” says Parsons. “The key is to contact us at the first sign of difficulty so we can work with you.”

Now, Jennifer has to find about $10,000 to make up the arrears plus some of the property taxes.

She ends up using $6,000 in her TFSA, which she had put away for a vacation to Europe, to pay the arrears. Then she took out a line of credit against her own house to pay the remaining $4,000.

Tyler had to review his finances and was placed on a strict budget based on current income from unemployment insurance and his severance package. Tyler also approached the bank to change the terms of his mortgage. By changing his amortization to 25 years and his loan type to five-year fixed, his interest rate drops to 2.79% (as of April 2015). So, Tyler was able to save close to $700 per month. He also found a roommate to help with expenses.

Jennifer drafted a legal agreement with Tyler for loan repayment of the arrears. He is making monthly payments to her and has taken a job as a day labourer to make ends meet. When he finds a better job, he will rework his budget.

Lisa MacColl is an Ontario-based financial writer.