We are often asked about buying a property with partner, be they couples, friends or family as an easy way of getting into the property market or expanding a portfolio faster than you could acting alone. It can be a great outcome however there are traps and technicalities you need to consider. The most important being that no matter which way you choose all parties are liable for the entire debt ( joint & severally liable ). This is usually enforced either by having all parties on the mortgage document or all parties as guarantors for each other. This will include anyone who doesn’t require a loan ie: they have sufficient cash available for their share. As far lenders are concerned if your name appears on the title then you are to one extent or another liable for the total debt secured against that property.
Also keep in mind that while some lenders offer what appears to be separate loans to each borrower ie: the accounts are in each individuals names, don’t think you are released from responsibility as these loans still require all participants to guarantee the entire debt. You have to realise that this is a liability for each individual and can have very serious impact on an individual’s future ability to obtain further finance ie: you have to declare all of the debt ( not just your share ) meanwhile you only get credit for your share of the income …
Typically a husband and wife jointly borrowing to purchase the family home. Both borrowers are liable for the total debt and on the death of one borrower the remaining borrower/s take up that persons share of ownership. For investment properties the income and tax are typically treated as 50/50% so a borrower with a large income may not be maximising their deductions under this structure. However lenders like joint loans, they are cheap and simple to structure and enforce.
Tenants in Common
Apart from investor partners, buyers who should carefully consider tenants in common are:
- a mix of non-spousal family members who have their own children or spouses
- couples with offspring from a previous relationship – to protect the inheritance interest of those offspring,
- couples who are using a parental guarantee – can be structured to offer some protection to parents,
- where an individual wants their share to become part of their estate for inheritance purposes.
This is where the ownership can be apportioned according to whatever ratio you desire but typically for unrelated partners it is based on the amount of money/equity that each person contributes and is described in a binding agreement. While joint ownership is very common with husband and wife borrowers, today many spouses may want to protect their natural children’s inheritance rights and ‘tenants in common’ can be a solution.
So as mentioned above with joint tenants one person dies the other person gets their share. Where as with tenants in common the persons share becomes part of their estate and so transfer of ownership can be dictated by their will.
The main purpose of tenants in common is that it allows for an uneven distribution of income and deductible borrowing ( please seek tax advice). Another important difference is that one owner can sell their share without impacting on the other’s ownership. Again this requires careful consideration and a clearly defined process within an ownership agreements so that all parties understand their options right from the start. You have to realise that without an agreement a part owner has free and unrestricted access to the property, imagine how problematic if the existing property is leased.
It sounds great and in reality it isn’t difficult to achieve as most home lenders are happy to lend with this structure and the legal requirements are minimal but in that lies the risk so please get good legal and mortgage advice before committing.