*This is a hypothetical scenario. Any resemblance to real persons is coincidental.
CFP, manager, wealth management, BDO Canada LLP, in Ottawa
Antonio P. Raviele
partner, Raviele Vaccaro LLP, in Toronto
Emily and Nicole want to buy a condo together to live in. Nicole’s parents have said they’d help with a down payment, but Emily’s parents can’t. Nicole has saved $45,000 and can probably get another $10,000 from her parents, and Emily has $35,000. All funds are in TFSAs. Nicole currently rents her own apartment, while Emily lives with her parents. Unfortunately, they want to buy in Toronto, where a two-bedroom condo is easily $500,000, if not more.
Theoretically, says Rahme, buying property together is a great idea. Many millennials are priced out of hot real estate markets like Toronto’s, and are also burdened by student loans, debt or job instability. A 2016 survey by RBC showed that 24% of millennials were considering buying a home with a friend.
These arrangements, Rahme says, work best when both parties are similar in terms of life cycle and lifestyle—if neither is in a serious relationship, for instance. “If one likes to party and the other likes to go to bed and wake up early, it may not be such a good idea,” she says.
How much should each put toward the down payment?
Both experts agree that Emily and Nicole should put equal amounts toward the down payment. With equal stakes, neither can make a claim for more entitlement to, say, throw a private dinner party or choose paint colours. It also avoids one of them claiming a bigger portion of proceeds from refinancing or selling the condo. For similar reasons, Raviele says, each woman should share equally in all expenses associated with maintenance and upkeep, including mortgage payments, property taxes, maintenance fees and utilities.
For a $500,000 condo, Nicole and Emily need 5% down, or $12,500 each, which their savings will more than cover. Rahme doesn’t recommend they put down more than that, especially in today’s low-interest environment.
“I’ve come across a lot of young professionals who are relentlessly saving because they think they need a lot of money for the down payment; that it will get them a better deal,” she says. “But it won’t.” Better to put down the minimum and direct extra money toward other costs.
Because the down payment will be less than 20% of the purchase price, and they plan on a 25-year amortization, they will require approximately $19,000 in mortgage insurance through the Canada Mortgage and Housing Corporation, which they can pay with their mortgage.
Land transfer taxes will cost the friends about $12,200. Fortunately, as of January 1, 2017, the Ontario government doubled the tax rebates for first-time homebuyers, which, combined with City of Toronto rebates, will lower their tax cost to $4,475.
Emily and Nicole should also budget for closing costs, moving costs and legal fees for creating a cohabitation agreement detailing their rights and responsibilities as co-owners. Such an agreement would start at about $1,500 plus HST, says Raviele.
Buy now or wait?
Given Emily’s job uncertainty and no immediate prospect of a permanent position, Rahme isn’t convinced she’s ready to be a homeowner. It may make more financial sense for her to continue living rent-free for a couple more years. If the goal is for the two to live together, says Rahme, another option might be to have Nicole buy the property with her parents’ help, and for Emily to rent from her.
If they still want to go ahead as co-owners but can wait at least three months, both women should consider opening RRSPs and transferring up to $25,000 from their TFSAs into registered plans. That will allow them to benefit from both the tax refund the RRSP contribution will generate and CRA’s Home Buyer Plan (HBP), which—after 90 days—will allow each of them to withdraw $25,000, tax-free, for the down payment. The downside: the money must be repaid over 15 years (1/15th each year). If not, the balance will show up as taxable income.
What about Nicole’s parents and their $10,000? Best to leave them out of the negotiations and the land title, says Raviele. It would contribute to a power imbalance between the friends and could introduce complications with their mortgage lender and lawyer. If Nicole’s parents want to contribute, they could gift her the money or arrange a separate, personal loan.
Advisors and real estate lawyers catering to urban millennials are familiar with the needs of co-ownership. A lawyer acting for both buyers, says Raviele, needs to educate clients on the terms of a joint retainer and would ideally recommend they each seek independent legal advice. The most difficult question in this situation is whether the two women should buy together, says Rahme: “Ultimately, that’s a personal decision. A financial planner’s job is to provide them with facts and context.”
Joint ownership or tenants-in-common?
Emily and Nicole can own as tenants-in-common or as joint tenants with right of survivorship.
As joint tenants, each woman would have an equal, undivided interest in the property. It means if one tenant dies, her share would go automatically to the survivor. As tenants-in-common, on the other hand, each would own a percentage (ideally 50%) of the condo, and could sell her share or leave it to any beneficiary upon death.
Each arrangement has pros and cons. With joint tenancy, says Raviele, the condo bypasses estate administration and taxes—but Emily and Nicole may want their respective shares to go to their parents, siblings or other family members, rather than each other. He also points out that joint tenancy leaves each woman vulnerable to the other’s creditors. This arrangement is better for spouses.
Tenancy-in-common, he says, is more appropriate for friends. It would allow each friend financial control over her portion and the power to leave her share to a beneficiary. The downside, Rahme says, is Emily or Nicole can sell or give their share to someone else without consent. “They could end up sharing ownership—and living with—someone they don’t know or quite possibly dislike.”
A co-ownership agreement can avoid that possibility by granting a co-owner right of first refusal—an entitlement over other buyers—to purchase the other’s share at the property’s appraised value. They should also consider enough term life insurance on each other to cover the mortgage if one of them dies, adds Rahme.
What happens when one owner wants out?
Creating a co-ownership agreement will force them to discuss finances, financial habits, credit history and lifestyle goals. Emily and Nicole should hire a lawyer to draft the agreement, addressing concerns such as:
- their respective ownership shares in the condo and share-to-sale proceeds;
- how to divide ongoing expenses, including maintenance, utilities, property taxes, insurance and unexpected repairs (Rahme suggests opening a joint account for expenses);
- how each co-owner will share in the acquisition costs, or reimburse each other for costs;
- how to divide chores and maintenance;
- circumstances under which the property can be sold, how the co-owners establish fair market value, and whether to afford right of first refusal if one doesn’t want to sell;
- planning for the event that one of the owners can’t afford to pay the mortgage; and
- how Emily and Nicole resolve disputes.
Emily and Nicole are relieved to know it’s OK to put down 5%, giving them more flexibility, and allowing them to stay on equal financial footing. They’re committed to buying the property together (as opposed to Emily renting), and they’ve decided Nicole’s parents should not have any formal or informal stake in their new home.
Susan Goldberg is a financial journalist based in Thunder Bay, Ont.