Non-spousal purchases can be attractive as it allows you to combine resources and purchase at higher budgets. In most scenarios, this usually involves two siblings, parents and children, or friends purchasing together.
How do banks structure this:
Banks use the same eligibility criteria outlined in this book. They will combine borrower’s income and expenses into their borrowing capacity assessment.
In most circumstances, the power of purchasing together is greater than doing it individually. This is because one of the parties to the transaction usually bring something to the table (by way of deposit or serviceability) – otherwise it doesn’t often make financial sense to purchase together.
The major downside is associated with joint and several liabilities of purchasing together. The way a mortgage works is that both parties are jointly liable for each other’s share of the debt. While there are products that allow each borrower to account for their share of the property, the legal responsibility to pay back the mortgage will be with both borrowers.
That is, if you purchased with your brother and he disappeared and left the country, you will be forced to repay his half of the debt too!
Financing joint purchases:
While the actual finance for a joint purchase usually involves purchasing at higher budgets and increasing your capacity for an individual purchase, another major downside is that it ties the two purchasers together for future transactions too.
For example, imagine John and Greg (brothers) decide to purchase a property together for $1 million and obtain a loan for that property of $800,000. John and Greg decide that they will purchase 50/50 and repay half the debt each. This property rents for $500 p/w.
A few years later, John then decides to purchase a ‘live in’ property with his wife. When assessing John’s financials, most banks will include the full $800,000 loan liability and expense in John’s borrowing power assessment, while only include half of the rental income! They will do this even though he only repays half the mortgage debt. This combination means a drastic drop in John’s borrowing power!
Note some lenders do not treat it this harshly, but these lenders are few and far between. Part of building a portfolio involves keeping as much flexibility as possible – limiting yourself to a small group of lenders is likely to restrict your growth ability in the future.
Other considerations:
Given the potential impact on your borrowing power and joint liability issue – purchasing jointly is best done with an exit arrangement in mind. It works best where the debt will be cleared at a definite point in time in future. This limits the borrowing capacity issue for a short time period, while allowing you to extract greater profits from purchasing at higher budgets.
It is also wise to talk to a lawyer and accountant and investigate setting up structures to protect yourselves both individually and set up appropriate exit arrangements.
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