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What is the difference between a Co-Borrower, a Co-signor, and a Guarantor?

This is another question that seems to be popping up quite a bit of late:

Is there a difference?

Let’s start out by defining each:

Co-borrower: On title and intends to make payments jointly. Likely living in the property as well.

Co-signor: On title, but likely does not live in the property and does not intend to make payments jointly, BUT assumes responsibility for the payments in the event of default.

Guarantor: Not on title, likely does not live in the property, does not intend to make payments jointly, BUT does assume responsibility for payments in the event of default.

What’s the difference

For all intents and purposes co-borrower and co-signor are essentially one in the same as they are both on title for and responsible for the loan.

The difference with the guarantor, is that the guarantor is not on title, but is responsible for the loan.

The guarantor requires to seek independent legal advice at the time of the closing of a transaction in which they are a guarantor, so that they understand that they are forgoing any interest in the property, by agreeing to not be on title, but that they are also 100% responsible if the people they are guaranteeing for, do not make payments.

Why would anyone choose to be a guarantor?

Well, in certain provinces, where there is land transfer tax, such as BC where we have the PTT (property transfer tax), if you do not qualify for an exemption, if you are on title, and wish to be removed, you must pay a portion of the transfer tax.

Why would you ever want to get removed?

Well, if and when, the person that you were helping out to qualify for their mortgage, is able to qualify on their own, by removing yourself from the mortgage, you would also have to remove yourself from title. You would want to remove yourself from the mortgage, to qualify for a larger mortgage yourself for instance.

With the stress test, where you must qualify for a payment reflective of an interest rate 2% higher than your actual rate, many people who are in this situation are finding that having co-signed for someone years ago, is finally starting to impact them.

This is another unintended consequence of the new rules, and again, the government – albeit the provincial government this time – stands to profit from it.

Does this actually impact people in practice?

We recently had a client whom this impacted. She helped her sister get a place 12 years ago. The value of the house has gone up and it is now worth 7 to 8 times what is owed on the mortgage currently.

She never lived in the property and she never told the bank that she was planning on living there. But the bank registered her as a co-signor, putting her on title. They did not discuss the guarantor aspect with her.

The stress test, and this mortgage is making it hard for her to qualify for her own mortgage now. Even though the bank has a 12 year track record of payments being made on time by her sister, they are making the sister qualify for the mortgage on her own.

Now, as is the case in certain communities, family helps out family. Sister has 2 car loans, one is for her brother and one is for her mom. She has never made a payment on either of these loans, but together, with the stress test on top of it all, this is impacting her ability to qualify for a mortgage that she has had and has been paying on time without any issues for 12 years.

On top of this all, if there is a way that everything can come together, and we are able to remove our client from the mortgage – the transfer tax bill will apply.

This will roughly cost the client $3,000-$5,000 to get out of.