Buying a house is often the biggest and most important investment in your life. With the increasing prevalence of couples living as common-law partners, it is important to consider several factors before making a substantial property investment alongside your unmarried partner.
Keep your interests first by candidly speaking with your partner.
As an unmarried couple, it is best to remind yourself that relationships can breakdown. There are different things to consider when purchasing a home with your common-law partner, as opposed to your married spouse. Therefore, it remains evergreen that you should keep your interests first!
Talk about finances.
Because this is a joint financial commitment, now is the best time to talk about your respective incomes. Discussing your incomes, credit scores, and debt obligations will provide the best opportunity to determine what kind of homes are financially feasible and responsible for you to pursue. Furthermore, this discussion should illustrate what process you should pursue regarding the mortgage application and how expenses should be handled.
Don’t buy outside your means and don’t rush!
By having your financial discussion at the outset of your investment journey, it will become more apparent what kind of properties are within your budget. As a gentle reminder, this is an investment that should never be rushed. Furthermore, as lending institutions evaluate your qualifications for a mortgage, it is important to evaluate your own financial capabilities to determine what homes are within your budget.
Purchasing on the lower end reduces your required debt and often helps you build equity faster, while purchasing on the higher end increases your debt but also increases your equity in the long term. Regardless, establishing a budget that reflects your financial status will make it easier to shop within your means and position yourself for a healthy financial future.
Don’t avoid difficult discussions.
A fear of confrontation can make financial conversations difficult, but they must be had prior to a commitment of this nature. Conversations regarding how finances will be handed, what ownership structure you would like to have, and how to handle household expenses and homeowner obligations, amongst other things, will enable you to understand the best course of action.
Consider a Cohabitation Agreement
A cohabitation agreement provides common-law partners who intend to purchase a home together a well laid out plan as to the terms and obligations while living together and what happens to the home in the event the relationship breaks down. As previously mentioned, investing in a property with a partner is a significant step forward and requires a variety of conversations to harmonize you and your partner’s goals.
Thus, it can be helpful to speak with a lawyer to discuss how to protect your interests alongside establishing each partner’s responsibilities.
For example, a general agreement would include what the structure of ownership will be, how expenses will be handled, terms that allow a partner to buy the other out, provide an exit strategy if one partner wants to sell, and avenues for dispute resolution.
Ownership Structures
There are three methods of property ownership in Ontario, each with their own optimal use: sole ownership, joint tenancy, and tenancy in common.
Sole ownership occurs when an individual is the sole person on the property’s deed/title. Only the person on title bears the responsibility of ownership and the mortgage’s commitment. In an unmarried partnership, only the individual on title retains the interest in the home and the debt obligations of a mortgage on title, regardless of whether the other partner resides in, or contributes to, the property as well. Individuals should be cautious and ensure to speak with a real estate lawyer to understand your rights, or lack thereof, under this structure.
Joint tenancy provides each partner an equal share interest in the home. The important distinction between joint tenancy and tenancy in common is the right of survivorship. Following the death of one partner, the entire interest in the home transfers to the surviving partner, and no portion will fall into the deceased’s estate.
Lastly, tenancy in common allows the owners to have a divided percentage interest of the property. While this division can be 50/50, it does not need to be even – for example, to reflect one partner taking on a much larger burden in financing the home – and also has no right of survivorship, enabling a partner to convey their ownership interest in their estate upon death.
Determine how you will handle disputes.
Additionally, creating an exit strategy that enables a partner to be bought out or otherwise sell their share will provide you with protection on your investment. Everything doesn’t always work out, but a written agreement will allow you to avoid contentious or otherwise stressful conversations if both parties are unable to agree on how to deal with the property upon a breakdown of the relationship. Furthermore, by stipulating how the parties will dispute their claims – for example, through the use of an arbitrator or mediator – could prevent significant legal costs.
How will you apply for the mortgage?
After determining the ownership structure, the most common question is what the lender’s application process will be with unmarried couples. Unmarried couples could receive the mortgage through a single or joint application, each with their own benefits. When determining which application to pursue, consider each partner’s credit score, income, employment history and debt-to-income ratio. The ratio is often very important to lenders as it illustrates how indebted you currently are and allows them to forecast how reliable of a borrower you are. Thus, most successful applicants have ratios around the 40% mark.
What should you do first?
The very first conversation on this subject should be with your partner to understand each other’s goals. A large investment like purchasing a property requires effective communication, and this will allow you to understand each other’s positions and how to best achieve your plans. Your next step should be speaking with a lawyer to understand the legal implications and benefits available to common-law partners who purchase a property. Additionally, by speaking to a lawyer, you can understand how your relationship status affects your legal rights to the property, and how to handle disputes. A legal professional can set you up to avoid any pitfalls and ensure you are well informed every step of the way during the purchasing process. This should be an exciting, enjoyable experience and the proper advice can ensure exactly that!