It sounds great in reality and it isn’t difficult to achieve as most banks are happy to lend with minimal legal requirements are but in that lies the risk and downsides.
While all parties may start off with similar ambitions and plans, people’s circumstances change and what was easy to get into can become a nightmare to get out of.
All parties are liable to all of the debt (joint and severally) but only entitled to their share of the rental income – the repercussions are very significant.
Let’s say two friends (A & B) decide to purchase a unit as an investment property. It’s unlikely that they are both on the same income and have same deposit and so they may decide to buy as tenants in common with friend A having a 70% share. Both of their names will appear on the title which means there can only be one lender involved with one mortgage. Many lenders will allow split or shared loan facilities where there are several accounts each with its own limit and repayment schedule. However both have to guarantee the others borrowing in addition to their own – (this would still apply if friend B had saved all the funds and didn’t need a loan – he would still have to guarantee the other). But let’s imagine the loan amount is $450k between the two friends and friend A has his share of $315,000 (70%) home loan account and friend B has a $135,000 (30%) home loan account.
A year later friend B marries his girlfriend and wants to purchase their own house – they apply for a $400,000 loan but get knocked back because friend B already has a $135,000 investment home loan and is also liable for friend A’s $315,000 loan. He at the time, didn’t choose the right lender that would only consider his share of debt. There are however only a couple of lenders who will do this. What’s more he can’t offer the shared property as security because he doesn’t own it and the lenders will only include his 30% share of the rental income when calculating his borrowing capacity. Suddenly friend B needs to sell but friend A for whatever reason doesn’t agree. Of course as tenants in common friend B can sell his share but who to? The answer is anyone and unless there is a co-ownership agreement restricting this, then there is nothing friend A can do about it. The new co-owner is entitled to physical possession of the whole property.
Things can get much worse where for example one of the borrowers becomes unemployed and can’t make his repayments – firstly most lenders will impose a penalty interest surcharge (typically 2%) on all loans meanwhile the other borrower must make the payments for him, or risk losing the property on default. Imagine how complicated this can become when one of your tenant in common is only an acquaintance or possibly someone you have never met (either party can sell their share to anyone).
It is vitally important that you talk to an experienced mortgage broker, have a tenants in common agreement, that a co-ownership agreement is put in place prior to the purchase and that all conceivable contingencies are covered. The agreement can state everyone’s responsibilities but it may not protect you if one of the parties sells their interest.
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