If you’ve bought property together with a partner, family, or friend and want to take out a new home loan, it’s worth looking into a common debt reducer policy.
While sharing expenses might have been a great idea to increase borrowing power at the time, it can become a big headache down the track.
Only a handful of lenders will apply a common debt reducer policy on shared finances.
Understanding in your own right what it is and how it works is the first step to solving this problem.
Taking Out a Home Loan with a Partner, Family, or Friend
As young adults are interested in property, it is not uncommon to partner with someone (husband or wife, friend, family member, flatmate, work colleague) to share costs and maximise borrowing power.
When you apply, lenders look at your debts and living expenses as a whole.
Most partners decide on a 50/50 split, making them joint tenants. If one person contributes more than the other, it is considered to be tenants in common.
As joint tenants, you will:
- no longer be seen as two parts of a whole but rather one legal entity owning the investment property;
- both have an equal interest in the property;
- be equally entitled to any income the property makes (rent);
- be equally liable for any costs the property incurs;
- receive full ownership of the property if your partner passes away, and vice versa.
Why No-One Tells You About the Negative Side of Buying Property with Another Party
There are obvious risks that come with investing in property with another person: you might have a falling out, or one of you might become unemployed.
One massive elephant in the room when it comes to things banks don’t tell you: common debt.
The reason why banks don’t employ a common debt approach right away is to cover themselves. While they want the best for their clients, they also need to weigh out their risks.
The benefit of having a mortgage broker on your team is that our job is to guide you through your financial decisions as our client. We at The Mortgage Agency believe that you should understand all future implications when making significant financial decisions.
Not only will we explain what common debt is, but we will also help you identify the lenders willing to offer a common debt reduction policy.
What is Common Debt and How Can it Affect Your Future Investment Loan Plans?
Contrary to the name, banks don’t consider common debt as common between the two shareholders.
If you would like to apply for another home loan in your personal capacity, banks assess your liability for the total debt. This means banks consider your portion of the existing debt as well as the other party’s.
Many people choose to apply for subsequent home loans in their personal capacity without their partner because the relationship sometimes sours between the couple. A husband and wife partnership might aspire to have properties in their personal capacity as well, in case of divorce.
But, this makes trying to take out a home loan in your personal capacity with most standard banks much more difficult since they consider your partner’s liabilities as well.
Things That Decrease a Partner’s Borrowing Power and Make Them Unattractive to Lenders:
- your partner just started a new job and didn’t have three months worth of bank statements, is on probation or if this is a lenders mortgage insurance application
- your partner is working part-time or as a casual and doesn’t earn a fixed income;
- your partner became self-employed and doesn’t have the correct financials;
- your partner was on maternity leave within the last two years and can’t produce two years’ consecutive tax returns;
- your partner has a low credit score;
What is the Common Debt Reducer Policy?
The common debt reducer policy is, unfortunately, uncommon.
Not a lot of banks prepared to offer this policy. For this reason, it’s worth contacting us at The Mortgage Agency or a mortgage broker who can identify the lenders in your area that do.
Under the common debt reducer home loan policy, you have to prove that your partner is self-supporting and can pay his/her half of your existing home loan repayments.
If the bank accepts this, they will then consider only the remaining half of the existing home loan for you (as opposed to the full 100%).
You need to prove that you can service your current 50% and the new home loan you are applying for.
What Are the Application Requirements for a Common Debt Reducer Policy?
There are certain things that the bank will want to see that relate to your joint tenant partnership, such as:
- three months’ shared home loan statements;
- a rundown of assets and liabilities;
- two years’ tax returns and financials; and
- two most recent payslips.
In your own capacity, make sure that you:
- have a good credit history without any defaults, bankruptcies or judgements. Many credit inquiries can be seen as negative, so try and keep them to a minimum.
- have proof of stable income for the last three to six months.
- have enough money saved up for the deposit.
- close unnecessary credit cards and reduce the ones you keep and their spending limits.
- try and eradicate bad debt.
- reduce unnecessary expenditure.
Why Do So Few Banks Offer Common Debt Reducer Policies?
Banks are always looking to cover the “worst-case scenario.”
Lenders consider 100% of the co-ownership agreement as yours because if something happens on your partner’s side, you will be held liable for the home loan.
Similarly, they only consider 80% of your rental income and use 20% as a buffer. Tenants might not pay their rent in time, unplanned events like COVID could lead to high vacancy rates – these things are seen as risks by banks.
Do Banks That Offer Common Debt Reducer Policies Charge Higher Interest Rates?
Not all lenders provide this type of policy and only a handful of banks offers this type of structure. Generally, the rates should not be higher just because it’s a common debt reducer policy. Rather, the rate is set by the bank themselves as a normal course of business.
Although obtaining a common debt reducer policy is possible, it’s not easy.
Always be sure to chat with a financial advisor before making big money decisions. They can walk you through the possible downsides of co-ownership that lenders don’t mention.
That way, you can make an informed decision prior, rather than realising the negative consequences (like the difficulty in getting one of these policies) only once it’s too late.If you are already in a co-ownership agreement and want to take out a home loan in your own borrowing capacity, contact a mortgage broker at The Mortgage Agency today. Let us do the hard work for you and find a lender willing to offer a common debt reducer policy at a low interest rate.
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.