In today’s market it’s quite common to apply for a home loan separately in individual names while you’re married or in a defector relationship, not just that, there is an increasing number of Australians opt to purchase through a co-ownership arrangement with their family or friends.
So how would this affect you when you’ve purchased something with family and friends but decide to purchase something by yourself ?
The problem that may arise is how is the bank going to treat these joint liabilities?
Majority of the banks will incorporate the debts at 100% instead of your actual percentage share. However, to help you improve your borrowing power, some lenders will apply what you call “common debt reducer”.
What is common debt reducer they say, it is a bank policy where they will only incorporate your percentage ownership of the debt into assessing your borrowing capacity.
In certain situations, this can be incredibly beneficial. Here’s everything you need to know about common debt reducer.
How Do Banks Determine My Borrowing Power?
For calculating your borrowing power or serviceability, banks don’t adhere to a particular method. If you want to buy a property with your partner’s help, your lender will take into consideration your debts and living expenses as a whole. This is also applicable if you want to purchase an investment property with your relative or friend’s help.
How Can Common Debt Affect My Investment Plans?
Generally, banks will take into account 100% of the debt and not your actual share, which is typically 50% (If you’re under joint tenant ownership). Further, banks only consider 50% of your rental income.
However, there are a few lenders that’ll take into account your actual share, whether it’s your combined liabilities or living expenses like a home loan, personal loan, or credit card. In such case, it means that the banks will assess only 50% of the joint debt instead of 100%.
There are some cases where if they require you to take on 100% of the debt and will also use 100% of the rental income as well.
Who Is Common Debt Reducer For?
At times, spouse’s want to take out a loan individually. There are various reasons as to why you wouldn’t want to take out a loan with your partner, such as:
- By having full control over the property or mortgage, you’ll have a higher chance of getting the property in case you divorce in the future. However, you must consult a legal expert concerning this issue.
- If you’re in a casual position or work part-time, your application might not be accepted because most lenders prefer someone with a stable income.
- If your partner just started working or became self-employed, they may not be able to provide tax returns for the last two years reducing your chances of a loan approval.
- If your partner has a low credit score, it might alarm your lender and decrease your chances of getting your loan approved.
On the other hand, a common debt reducer home loan can be beneficial for:
- Work colleagues
- Relatives or siblings
What Are the Requirements?
Both the partners must provide proof of self-supporting income for their share of liabilities and current debts ( in most cases), which is generally in the form of:
- Shared home loan statements of the last six months
- A list of your liabilities and assets
- Newest notice of assessment
- Last two payslips
However, you must remember that for home loans, it’s not always a 50-50 split. With joint tenants, each person will receive 50% ownership. In the case of tenants in common, the division depends on your agreement with your solicitor when you bought the home. This is quite common for co-ownership arrangements where you contributed more than your partner. You may also cover a significant portion of the mortgage. In such a scenario, you may end up with 75% of ownership, this could be for taxation purposes.
Other than proving your income capabilities, you’ll also have to meet the following requirements:
- If your credit file is free from defaults, bankruptcies, judgments, or a lot of credit inquiries, you’ll have a higher chance of approval. However, in certain cases, some lenders may be able to help you out.
- You’ll have to prove that you worked a stable job for at least 3-6 months.
- Depending on location and property type, some lenders might have restrictions.
- For the whole home loan, you need a minimum deposit of at least 5% of the property’s value as genuine savings. You can use a guarantor to borrow up to 105% of the property’s value in certain cases.
How Do I Improve My Borrowing Power?
If you want to increase your chances of approval, you can do the following:
- If you have any unnecessary credit card facilities, you must close them. You can also consider reducing the limit.
- If you have any existing bad debts such as personal loans or car loans, pay them out as much as possible.
- Reduce your unnecessary living expenditure
You must also ask your non-borrowing partner to follow the tips mentioned above. In this way, you can enhance your borrowing capacity.
Do I Need To Pay A Higher Interest Rate?
Generally no, the lenders that offer “ Common Debt Reducer” are your major banks.