Whether you dream of owning a downtown condo, a cute bungalow in the 'burbs, or buying land to build a house, scrolling the real estate listings is likely causing sticker shock.
In 2022, the average home price in Canada is $748,450 — a 21% increase over the previous year — and prices are even higher in big cities like Toronto and Vancouver.1 As home prices continue to climb, homeownership may seem out of reach. But buying a house with a friend in Canada could help you achieve your goal of owning a home.
We're seeing quite a bit of interest [in buying homes with friends]. They decide, instead of paying rent, to buy a house together and pool their resources to get into the market.
Things to consider
Buying a home with friends is a big step. Before you make an offer on a house and establish joint tenancy with roommates, there are some things to consider:
- Crunch the numbers
Have an open discussion with your prospective roommate about your income, credit card debt, and loan balances to get an idea of your total debt-to-income ratio and how much home you may qualify for. Are either or both of you wanting to pull from your RRSP as part of the Home Buyers Plan? Are you eligible for the First-Time Homebuyers Incentive? All of this will factor into what you could buy together.
- Check your credit score
Check your credit report and make sure each co-owner has a credit score of 640 or higher, which is the minimum credit score to get approved for a mortgage in Canada.2 A higher credit score will also help you secure a lower interest rate on your mortgage loan.
- Set a budget
How much do you have for a down payment and what is your monthly maximum for mortgage payments? It's important to agree on these numbers before calling a real estate agent, talking to a mortgage lender, and shopping for a home together.
Benefits of buying with friends
You already know that living with a roommate means splitting the cable bill and the household chores. Buying a home with friends also offers many benefits.
Bigger down payment
One of the biggest pros of co-buying a home or buying a vacation property with friends is pooling your resources for a down payment, according to Geiser.
"For most people, the biggest struggle is the down payment," Geiser says.
If your lender requires a 20% down payment on a home with a purchase price of $350,000, you need to come up with $70,000. Split it with a friend and you'll each contribute $35,000 toward the down payment, which Geiser believes may be more reasonable for a first-time homebuyer.
Greater purchasing power
The housing market is hot and a homebuyer with an income of $47,000 — the average for Canadians between the ages of 25 and 34— may not qualify for a large enough loan to purchase a home or cover the entire mortgage solo.3
Co-buying real estate with a friend allows you to combine your annual salaries for increased purchasing power. Similar to married couples with two salaries, two borrowers with income may qualify for a larger mortgage loan to purchase a single-family home or condo or for buying land with friends to build a house (or houses).
“For one person to purchase a home is hard unless they have an extremely strong salary," says Geiser.
Make an appointment with a Scotiabank Home Financing Advisor to find out your loan qualification requirements.
You may not want a roommate forever, but buying a home with a friend is a good short-term solution to start building equity. Across Canada, the year-over-year price gains on real estate are currently in the double digits,4 allowing you to benefit from the equity that builds in an investment property.
The majority of people in this scenario would generally go with a three- or five-year fixed rate. The fixed rate gives you the security of the payment, but it also gives you the opportunity, after three or five years, to sell without a penalty.
Disadvantages of buying with friends
Buying a house with friends has its downsides, too, especially when it comes to logistics.
Geiser suggests focusing on the details before purchasing property with a friend or family member. For example, even though you have co-ownership in the property, you may have different ownership shares depending on how much each of you contributed to the down payment and mortgage payments.
In addition to outlining the interest rates and mortgage terms, your real estate lawyer will create a mortgage contract that establishes joint tenancy, ownership shares, and rights of survivorship, but you'll need to determine how to split the proceeds when you sell — and Geiser suggests getting those things in writing before buying a home together.
How do a joint mortgage and finances work?
The home buying process for joint tenants is similar to married couples: Both names are on the ownership agreement, both parties are responsible for paying the loan principal, mortgage interest, and property taxes — and the co-owners must agree to refinance a home purchase or deal with the personal finance repercussions of missed payments or foreclosure.
How does co-ownership work?
The concept of co-ownership is simple: You buy a house with one (or more) friends or family members and share in all of the costs associated with buying and maintaining a home. Each co-owner is listed on the title and the mortgage loan.
Geiser suggests establishing a joint chequing account and contributing equal amounts to cover the mortgage, property taxes, and utilities each month. It's also a good idea to contribute a little extra.
“Add an extra $200 to $300 to that account [every month] and that allows you to accumulate a buffer for repairs if something comes up," says Geiser.
Do's and don'ts of buying a house with friends
Find a lender that is right for you: It's important to find a mortgage lender that offers an option that works for your situation, including the rate and terms, before signing on the dotted line. Geiser also suggests looking for a lender who's familiar with this type of ownership and can guide you in making good decisions.
Have a plan for handling disagreements: You want to replace the roof, but your roommate (and co-homeowner) thinks the shingles are sturdy enough for another season. How will you resolve conflicts related to homeownership?
Make major decisions solo: Painting your bedroom a bold hue might not be a big deal but inviting a significant other to move in should be a joint decision. It’s important to discuss this all ahead of your purchase – what decisions do you need to make together?
Forget to divide up the financial responsibilities: Who will write cheques from your joint chequing account to make sure utilities, property taxes, and other shared expenses are paid on time? Deciding that ahead of time can help you avoid arguments down the line.
Quick tips to avoid unexpected circumstances
Let’s say you easily agreed on the perfect house, wrote a solid offer, and completed all of the required loan documents to become official co-buyers. To make sure your co-homeownership experience goes well, Geiser advises talking about how you'll handle unexpected circumstances like job loss, death, or a long-distance job transfer that could affect your ability to pay the mortgage or your desire to sell the home. You will want to discuss what sort of home insurance will you be getting.
No matter what comes up, remember that you're not just joint tenants; you're friends. If something unexpected happens, talk about it. It'll help make sure the friendship lasts long after you both move on.