Finance expert Catherine Lezer answers readers’ questions on whether to borrow solo or jointly with another, and on what to do when your pre-approval expires.
Borrowing Solo or Together
Question: My partner and I are thinking of investing in property using the equity in our home, which we bought jointly. Both of our names were also on the mortgage as co-borrowers. What is a better structure when we buy an investment property? Should we borrow together or as just one borrower? What are the pros and cons of each choice? We want to be able to keep investing in the future, so we want to structure our purchase properly.
Answer: Generally you can borrow more and hence buy more properties if you invest separately. So if your aim is to buy many properties, then it’s worth looking at this strategy closely. That said, you already have a joint asset, which affects your borrowing power more than you would expect. It is important for you to understand the practicalities as well as bank policy here.
My first question is: are you both earning a ‘provable’ income? Obviously, if one of you is not, then it’s going to be difficult or impossible to borrow in that person’s name alone.
Is there any reason why one of you would be at risk of being sued? If so, then that person should own as little as possible in their own name for asset protection reasons.
But assuming you both have a provable income and there are no asset protection considerations, then let’s get into the fun topic of bank policy.
You already have a joint asset and a joint loan. Whenever you buy a property with another person, including your spouse, the contract you sign with the bank states that all parties are ‘jointly and severally liable’. Practically, this term means that you are 100% responsible for the loan and so is the other person named on the mortgage. You are both 100% responsible – simple. This means that, if one of you can’t or won’t pay your share, the bank expects the other person to pay all of it. Following this through, if there is a default on your loan because of the other person’s actions, you are also in default. It’s not fair, but that is the reality of the loan contract you sign.
If you wanted to buy your next investment property in your name only, you would work out your figures, probably taking into account 50% of your existing home loan repayment, and then work out whether you could afford the loan repayments for the next property. However, when the bank does the figures they take into account 100% of your existing home loan repayment (because you are jointly and severally liable) and then work out whether you can afford the loan repayments for the next property.
The bank is essentially burdening you with the entire first loan, despite it being notionally 50% your responsibility and 50% your spouse’s. Clearly this means that ultimately you can borrow less for your subsequent purchases.
As you say that your goal is to buy multiple investments, you will have to be careful about this policy. There are a couple of lenders that have a way of working around it, so if you decide to go down this path, then speak to your mortgage broker.
I would like to know some more specifics about your situation before I can advise more fully. Please email me if you would like further advice.
Question: I got a pre-approval from my bank about two months ago. Unfortunately, I haven’t found the property I would like to buy. What happens if the pre-approval expires before I find the property? Will I have to get another one? Can I just extend this existing pre-approval?
Answer: It can be frustrating being ready to buy but the right property just doesn’t pop up. Never fear,
you can extend the pre-approval for another three months. Technically it is a new application, but it’s actually pretty easy to do.
Just show the bank that you still have your savings(three months’ savings account statements) and are still employed (two recent payslips), and sign the forms again, and they will extend the pre-approval for another three months, and another, and so on until you find something to buy. The hard bit, as you have already found out, is finding the right property!
At the end of the three months it would be worth double-checking with your mortgage broker whether the bank you have the pre-approval with is still the best bank for you. Interest rates and policies change all the time, so since you have to redo the paperwork anyway, it is the opportune time to look at all the options again.
Disclaimer: The views provided are of a general nature and should be considered as general information only. This is not financial advice and it is not to be acted upon without advice from a qualified professional who understands your personal circumstances.