If you’ve been asked by a family member or friend to co-sign on a loan or mortgage, you may wonder if you should agree to take on the role. Georgia Swan, Tax and Estate Planner, TD Wealth, joins Greg Bonnell to discuss what to consider before signing on the dotted line.
- Have you been asked by a family member or a friend to co-sign on a loan or mortgage? Well, if so, you might be wondering what your role is exactly and what the potential implications are of saying yes. Georgia Swan, Tax and Estate Planner at TD Wealth, joins us now to talk about some of the things you may want to think about before signing on that dotted line.
Georgia, always such a pleasure to have you with us. What an interesting topic. First off, let's talk about, if you're asked to co-sign-- why would someone even ask you to do this?
- Well, generally, a lender will ask this where they think they need some added security for the servicing of the debt, just in case the primary borrower can't actually fulfill their obligations. So it is something that's very, very common whenever anyone is borrowing money.
- So that's interesting. So now we start to understand, perhaps, some of the-- It's a serious topic. As some of, perhaps, the co-signer's responsibilities, is it as simple as just adding your name to something? I've got to imagine there's more to it than that.
- No, there definitely is. Well, each lender is going to have, perhaps, slightly different terms. The first thing that you have to be aware of is that you are fully responsible for the entire debt. So this could have credit repercussions for you. As well, you also have to be aware that, as I said, some lenders will ask for different things.
But where, for example, a lender is lending money on a mortgage-- so in other words to secure the purchase of real property-- they might actually ask you to go on title to the property, as well. Some lenders might ask for title to be held jointly between the primary borrower and the guarantor, or the co-signer.
But in a lot of cases, the larger financial institutions, where it's a mortgage, will allow the co-signer and the primary creditor to decide what the percentage should be. So a lot of times in those cases, you'll see maybe the co-signer is there to add a 1% interest, whereas the primary borrower is at 99% interest. So that's usually to make sure that the primary borrower still gets things like the principal residence exemption.
But there can be a lot of responsibilities that are involved. So it is important to make sure you know what you are, in particular, signing on for.
- OK, Georgia, not only important to know the responsibilities, perhaps the potential risks if you're considering signing on. What would some of those be?
- So, like I said, it goes on your credit report. And the full amount goes on your credit report. So if there is a default, that potentially could affect your credit rating. As well, there can also be estate-planning implications. You essentially own a portion of this property. So you may have to change your will to make sure that you convey that portion that you own back to the original borrower.
You don't want to have a situation, for example, where you own 1% of the child's property as joint tenants. And then you forget about it and you put it in your will that I leave everything equally to all four of my children. And, essentially, you've conveyed one quarter of that 1% to each of the kids. So this might mean that you have to update your estate planning documents.
So all of these things are major considerations when you're asked to do this.
- You talked about a potential risk to your credit rating. I am told by some people who are experts in this field that often we don't really understand what our credit rating is. Take us into that a bit.
- Well that's important because depending on what your credit rating is, you either may not be able to borrow at all or you may have to borrow at higher rates. So because the full value of the loan goes on your credit report, if there's a default, that can actually lower your credit rating. And if you at some point in the future need to borrow money for your own purposes, that can have a real effect on your ability to borrow or what rates you might be offered.
- So there are responsibilities here. There are risks here. I think, then, the next thing would be if someone's considering this, how would they go about protecting themselves as a co-signer?
- OK, first and foremost, know what it is that you're signing. This is a legal obligation that you're getting yourself into. So make sure that you get independent legal advice and you have a lawyer explain to you the exact terms of the agreement that you're signing, as well as what repercussions, and obligations, and responsibilities you have, in the event that this doesn't go well.
The other thing is, make sure you're doing this for someone that you trust implicitly, and who's willing to sort of prove to you as time goes on that they are indeed maintaining the debt. And, of course, make sure you speak to your investment advisor or financial planner to know that you are OK in terms of what you need financially going forward. Because as I said, this might affect your ability to borrow money for yourself in the future if you suddenly have need of extra cash.
- All right, Georgia. I think of myself as fairly clever on these issues, having done this for about a decade, interviewing smart people like you. When you started talking about a quarter of 1% and estate planning, that made me think, as you said, maybe if you're going to do this you do chat with a professional first.
- Absolutely, it's so important. Because I think a lot of people, they want to do this out of the goodness of their heart. And, really, that's kind of the only upside for somebody who is being a guarantor or a co-signer. It's kind of the gratitude of the person you're doing it for. But you're getting yourself into a lot of responsibility. So make sure you know what that means for your particular situation.
- Always insightful, Georgia. Thanks for that.
- Thank you.