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Avoid: Falling into Co-Borrowing Traps

Affording a home with a single income can sometimes present an obstacle for prospective homeowners. Therefore, some people seek to combine incomes with another trusted individual, so that they may be able to qualify for and acquire their dream home.

Borrower & Co-borrower Obligations

In many instances, the agreement made between these parties (who are often not related to each other) is that the primary borrower shall be solely responsible for the monthly mortgage payments and all related property expenses, and the other party (co-borrower) shall have no obligations in this regard. Even with relatives, the agreement between the parties, for example, a mother and young daughter or two siblings, the ownership may be in the interest of one party over the other.

angry-personsWhile such a strategy is understandable, it is extremely important, however, that prior to the signing of the mortgage deed, both parties obtain independent legal advice regarding their liability and entitlements under the mortgage. This is of particular importance in relation to the co-borrower whose income is, in effect, being used to facilitate the approval of the mortgage transaction to purchase the property.

The obligation of the borrower and co-borrower in respect of their liability under the mortgage is that each party is equally liable in his/her personal capacity to repay the mortgage loan in accordance with the terms and conditions specified in the deed of mortgage. This liability is ‘joint and several’, that is, each party is responsible for the payment individually as well as together, and not only in proportion to their ownership. In essence, if one party is unable or unwilling to contribute, the other party is responsible for the entire debt.

Tenantship

The general rule and practice is that both parties to the mortgage must be owners of the property that is intended to be mortgaged with each person being entitled to an equal share of ownership. Such ownership may be either as ‘joint tenants’ or ‘tenants in common.’ Joint tenants share equal ownership of the property and have the equal, undivided right to the property. Join tenants enjoy the right of survivorship ie. the death of one joint tenant automatically transfers the property to the survivor.

Tenants in common however, are distinguished from joint tenants in that they may own a larger share of the property and may dispose of this share as they wish. Tenants in common also do not enjoy the right of survivorship and therefore, on the tenant in common’s death the property goes to his estate.

Agreements gone Awry

It means, therefore, that in deciding to enter into a mortgage, particularly where both parties are not intended to have the privilege of full occupation of the premises, both parties must be prepared for a long term commitment to the debt. They must commit to honouring the terms and conditions for the repayment of the loan over the duration of the facility, which is usually for a period of at least 15 years, regardless of how their relationship may change.

Unfortunately, it is not uncommon in these situations that circumstances arise that result in one of the parties to the mortgage, usually the co-borrower, requesting that he/she be removed as a party to the transaction. However, this request is neither an automatic nor simple process, particularly if the relationship between the borrowers has become an acrimonious one.


TTMF encourages Legal Consultation

It is against this background that the TTMF generally advises such prospective purchasers to obtain independent legal advice about their rights and obligations under the proposed mortgage, as necessary and/or appropriate.

This process requires that:

  • Each party hire the services of his/her own attorney-at-law. The respective attorney will explain the nature of the obligation and fully advise the liability that each borrower would incur by entering the transaction
  • The attorneys would also explain how such liability could be enforced by the Mortgage Company
  • Each borrower would be required to confirm that he/she fully understands all that has been explained
  • The co-borrower will be required to confirm that in signing the documents that accompany the transaction he/she is acting freely and voluntarily and not under any undue influence exercised by either the primary borrower or any other person
  • The attorneys would then issue a Certificate of Independent Legal Advice to the respective borrowers, which is provided to the Mortgage Company

meet-lawyerThe decision by the borrowers to waive independent legal advice would also be cited in the documentation accompanying the mortgage transaction.

There are those who may suggest or even argue that the recommendation by the TTMF to seek independent legal advice is both an unnecessary expense and inconvenience. This is particularly so where there is pressure to close the mortgage deal and to purchase the property. However the old adage, ‘an ounce of prevention is worth a pound of cure’ could not be more applicable than in this context.

The same words of caution apply to guarantors of loans. The purchase of a property should not only be smooth; it should also be beneficial and equally so for all parties to the transaction.