Co-Signing: What Every Guarantor Must Know

Co-signing for a loved one is a generous gesture that can carry significant financial consequences. In Quebec, suretyship is a contract governed by articles 2333 to 2366 of the Civil Code of Quebec (CCQ). Before agreeing to guarantee a mortgage or any other credit, it is essential to understand the exact nature of this commitment and its répercussions on your own financial situation and credit file.

The Legal Framework of Suretyship in Quebec

Suretyship is defined in article 2333 of the CCQ as a contract by which a person binds themselves toward a creditor to perform the debtor's obligation if the debtor fails to do so. The guarantee may cover part or all of the debt. There are two main forms of suretyship in Quebec: simple suretyship and solidary suretyship.

• Simple suretyship: the guarantor benefits from the benefit of discussion (art. 2347 CCQ), meaning they can require the creditor to first attempt to recover the debt from the principal debtor before turning to them. The guarantor also benefits from the benefit of division if multiple sureties are involved.
• Solidary suretyship: the guarantor waives the benefit of discussion. The creditor can pursue them directly, simultaneously with or separately from the principal debtor, for the full debt. This is the most common form required by financial institutions for mortgage loans.
• Guarantee of a future obligation: provided for in article 2362 of the CCQ, it can be revoked as long as the principal obligation has not yet arisen. This provision offers some flexibility to the guarantor.

Impact on the Guarantor's Credit File

Mortgage suretyship is recorded on the guarantor's credit file at Equifax and TransUnion. The full amount of the guaranteed debt appears as a financial commitment of the guarantor. This entry directly impacts the guarantor's credit score and borrowing capacity. The total guaranteed loan amount factors into the total debt service (TDS) ratio calculation, which is capped at 44% under OSFI's Guideline B-20. If the principal debtor makes a late payment, this negative information is also recorded on the guarantor's file.

Concrete Consequences for the Guarantor

1. Reduced borrowing capacity: The guaranteed amount is counted as the guarantor's debt. If you guarantee a $300,000 mortgage, this amount is added to your own debts in the TDS ratio calculation, which may prevent you from obtaining your own mortgage.
2. Risk of debt repayment: If the debtor defaults, the solidary guarantor can be pursued for the full mortgage balance. The creditor does not need to demonstrate that they have exhausted their recourse against the principal debtor under solidary suretyship.
3. Credit score impact: Any late payment by the principal debtor, even a minor one, can result in a negative entry on the guarantor's credit file at Equifax and TransUnion, affecting their score for a period of six years in Quebec.
4. Difficulty withdrawing from the guarantee: The guarantor cannot unilaterally revoke their commitment for an existing debt. Release can only occur with the creditor's consent, through full debt repayment, or through refinancing that excludes the guarantor.

Recommendations for Mortgage Brokers

AMF-certified mortgage brokers have a professional duty under the LDPSF to fully inform anyone considering acting as a guarantor. This information must include a clear explanation of financial risks, the impact on the credit file, and the difficulty of withdrawing from the guarantee. The broker should recommend that the potential guarantor consult an independent legal advisor before signing. The broker should also explore alternatives to suretyship, such as a larger down payment, a B lender willing to approve the application without a guarantor, or restructuring existing debts to improve the primary borrower's ratios.