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For those looking to purchase their first home or boost their borrower profile, adding a co-signer or a guarantor to their mortgage application can make all the difference between getting the necessary financing and being rejected. On the other side of the fence, acting as a mortgage co-signer or a guarantor can bring the satisfaction of helping your loved one get their foot in the door of the Canadian real estate market.
But what exactly is a mortgage co-signer vs. guarantor, and which option is right for your situation? Although the two concepts are similar, a mortgage co-signer is not the same as a mortgage guarantor and carries a different level of responsibility and involvement. Together, let’s explore further the key differences between a co-signer vs. a guarantor to help you decide which option best suits your needs.
Understanding the roles of a co-signer and a guarantor is crucial when entering the Canadian real estate market and mortgage applications. A mortgage co-signer can provide additional assurance to lenders when they have concerns about the primary borrower’s ability to repay the mortgage, but this extra level of security comes at the cost of certain legal and financial obligations for the co-signer themselves.
A mortgage co-signer is a person who can help a mortgage applicant qualify for a loan in cases when they aren’t able to do so on their own. Including a co-signer on a mortgage or loan application means that more than one person is responsible for ensuring that the loan is repaid. This, in turn, reduces the lender's risk and increases the chances of the mortgage application being approved. In simple terms, lenders like co-signers and are more likely to extend funds to applicants who include co-signers on their mortgage applications.
Both borrowers and co-signers are equally responsible for paying back the loan, and both are added to the mortgage and the home’s title, assuming shared home ownership. The co-signer may or may not make regular mortgage payments, but they will immediately assume this responsibility should the primary borrower default. This joint responsibility is reflected on both the borrower’s and the co-signer's credit reports, equally impacting the credit history of both individuals.
Generally, a co-signer is required if the primary applicant can’t qualify for a mortgage on their own merit due to a subpar credit profile or inconsistent income. Oftentimes, parents choose to act as co-signers for their children to help them qualify for a mortgage, particularly if they are purchasing their first home and have a limited credit history, insufficient income, or have received a denied mortgage application in the past.
While most lenders will allow adding a co-signer to the mortgage application, only some will allow including a guarantor. Becoming a guarantor generally carries less responsibility than becoming a co-signer—but it also means that a guarantor can only give a small boost to the primary borrower’s application.
A mortgage guarantor is somebody who “guarantees” to take over mortgage payments in case the primary borrower defaults. The guarantor's name appears on the mortgage agreement but not on the property title, meaning that the guarantor has no ownership interest in the property. Nonetheless, the extra layer of security provided by the guarantor can increase the chances of mortgage approval or ensure more favourable rates and terms for the primary applicant.
Unlike mortgage co-signers, guarantors aren’t added to the property title. While they are not directly involved in the ownership of the property, mortgage guarantors are included in the mortgage documents and have a certain level of responsibility for making loan payments should the primary borrower fail to do so.
If the borrower defaults, the guarantor will not automatically assume responsibility for mortgage payments. Instead, the guarantor will only be held liable after all the other means of mortgage repayment have been exhausted. Nonetheless, failure to make mortgage payments may negatively impact the guarantor’s own credit history.
Guarantors are commonly used when the primary applicant needs a small boost in their application—often when securing their first mortgage. For instance, a young home buyer may need to use a guarantor if they can qualify for the loan based on their income but have a limited credit history or a poor credit score.
Both mortgage co-signers and guarantors act to strengthen the primary borrower’s application. However, the two parties have slightly different roles and levels of responsibility, with mortgage co-signing generally being a more involved option.
It is rare for lenders to release mortgage co-signers or guarantors from their responsibilities. If the primary borrower wishes to remove a co-signer or a guarantor from their mortgage agreement, they would need to refinance or apply for a mortgage switch, which requires them to qualify for the new loan on their own. Alternatively, the primary borrower may use another co-signer or guarantor when applying for the refinance.
Whether you are asked to act as a co-signer or a guarantor for a mortgage, you will enjoy the ability to make a difference in somebody’s life by enabling them to achieve their homeownership goals. At the same time, you will be putting your own financial well-being on the line. So, ensure that you carefully evaluate the pros and cons of being a co-signer vs. guarantor before making the decision.
Generally speaking, becoming a co-signer does not have any advantages for the co-signer themselves other than helping a loved one purchase their dream home. If you act as a mortgage co-signer for a close family member or a friend, you may enjoy the satisfaction of helping them qualify for a mortgage or secure more favourable loan terms.
Similarly to being a co-signer, becoming a mortgage guarantor can act as an avenue for you to help a close family member or a friend achieve their homeownership goals. In addition, acting as a guarantor carries less responsibility than acting as a co-signer and will not affect your credit profile as long as mortgage payments are made on time.
If you are considering becoming either a guarantor or a co-signer, there are several factors you should keep in mind:
Aside from the pros and cons of supporting somebody else’s mortgage application, it’s crucial to consider your relationship with the borrower, their and your own financial situation, and legal risks and obligations associated with co-signing or guaranteeing.
Most of the time, the role of a mortgage co-signer or guarantor falls on close relatives or friends who wish to help their loved ones achieve their homeownership goals. As a co-signer or guarantor, you will be taking on certain financial risks and obligations, so ensure that the primary borrower is someone you trust.
Before agreeing to have your name added to the primary borrower’s mortgage, carefully evaluate their financial situation and ability to make regular mortgage payments. By carefully choosing who to co-sign or guarantee for, you will be able to minimize the risk of being faced with mortgage payments yourself. In addition, ensure that you have the financial means to cover the mortgage payments yourself, should this responsibility fall on your shoulders.
Before signing any mortgage documentation, think carefully about the legal responsibilities associated with this signature. If the borrower defaults, you may be held liable for the full amount of the debt—plus, your credit score and financial reputation might take a hit.
If you realize that you are not ready to act as a co-signer or a guarantor for the primary borrower, you may encourage them to find another co-signer, use a different type of collateral, or even work with private lenders. The best option for the borrower is always to improve their creditworthiness and try qualifying for the loan on their own, albeit this may take a few months.
If you are asked to act as a mortgage co-signer or guarantor, this decision should never be taken lightly. After all, you are putting your own creditworthiness on the line and risking significant legal and financial implications should the primary borrower default. Nevertheless, acting as a co-signer or a guarantor is sometimes the only option to help a loved one purchase the home of their dreams, so think carefully, consider all the pros and cons, and do your best to make a thoughtful, well-informed decision.
Take time to carefully review the documentation and thoroughly understand all terms, conditions, and obligations outlined in the agreement. Ensure that you know the difference between becoming a co-signer vs. a guarantor, and choose the option you are most comfortable with.
Also, remember to review the mortgage repayment schedule, interest, fees, and any potential penalties or charges. Finally, keep in mind that a mortgage refinance is often the only way for the guarantor or co-signer to free themselves from the associated financial and legal obligations, so examine the mortgage term and potential refinance options.
Have an open and honest discussion with the primary borrower about the expectations and responsibilities of all parties involved with the mortgage.
Discuss these and any other potential risks and possible situations in detail and document the consensus.
Should you have any questions or doubts, working with an experienced legal or financial professional can help set your mind at ease. If you wish to discuss the legal or financial implications of acting as a co-signer vs. guarantor, better understand potential risks, or explore alternative options, don’t hesitate to reach out to me. I will be more than happy to walk you through everything you need to know to make an informed decision and help you or your loved one secure the financing they need to become a homeowner.
Andrew Thake is a seasoned mortgage broker with over 15 years of industry experience. He’s assisted more than 2,200 clients in finding their ideal mortgage solutions. Recognized for his excellence, Andrew has received high honours and awards, including the National Rookie of the Year from TD Canada Trust and recognition as a Top 10 Ottawa Mortgage Broker in 2023. He has also been inducted into the Hall of Fame at Dominion Lending Centres and has consistently received their Platinum Award during his tenure as a mortgage broker.
Andrew’s dedication lies in serving his clients and prioritizing their needs with an empathetic approach. Throughout the application process, he provides tailored, informed, and efficient services to ensure the best mortgage solutions for his client’s unique circumstances. The best part of Andrew’s job is when he gets to see the joy on his clients’ faces following their mortgage approval.