Bank tells me I'm 'maxed out' any suggestions??

[Red Dust]

This is my first post but have read many of your helpful replies and am often heartened by how much information and experience people are willing to share. Anyway my situation is this:

Have two properties in Melbourne, one in Fairfield worth approx $800-900k and owe $410, this is rented out at $540/week and i am paying interest only loan. Will be my PPOR when I move back in 12 months

The other is an investment property in Carrum Downs and worth approx $350k and owe $195 rented at $200/week and interest only loan.

Finally I am in a joint ownership situation of a house in Broome WA, worth approx 700k and my portion of the loan is only 150k, but the other owner owes more like 360k. This will be rented out shortly for approx 800-850/week.

I am keen to continue along with my investment opportunities, and have contacted a broker recently to see how I may be viewed for another loan, however, he told me that I am maxed out, and would not be able to get a further loan due to the jointly owned property in Broome, as the bank would apportion the whole dept to me which doesn't make me look good on paper

I guess my question is as I am fairly new to property investing, I can see that I have structured myself poorly for future growth and wondered if any of you property guru's have any suggestions that I may be able to consider to allow me to continue on this path. Look forward to your replies....

 

[Aaron_C]

Hi Red Dust there are lenders who only take a portion of the debt you owe on the jointly owned property. Your broker must have overlooked this - as they are not the big-4 banks.

 

[Rolf Latham]

I guess my question is as I am fairly new to property investing, I can see that I have structured myself poorly for future growth and wondered if any of you property guru's have any suggestions that I may be able to consider to allow me to continue on this path. Look forward to your replies....

Hiya

What Aaron said, he knows what he is on about there and is located in the same state as your IPs.

Expanding that a little.

the concept YOUR broker is talking about is known as Joint and Several Liability.

The concept makes the assumption that if your investment partner fails to pay their side of the the mortgage you would liable for this under your loan arrangement.

This is known as a "contingent" liability.

Your broker is correct that almost all lenders will look at the deal as they have proposed.

However there are at least a couple that have a specific policy to get around the Joint and several laibility issue.

The reality though, that yes, you have given yourself a major disadvantage quite possibly for your future investment capacity.

I suggest you work out a financing /mortgage plan on ur strategy to see what you can do moving fwd.

ta
rolf


ta

rolf

 

[Paul Thewlis]

Hi Red Dust,
I agree with the previous two comments. It underlines the need to plan ahead. If you are buying an investment property jointly with someone else other than your spouse/partner then it's best to look at finance where each of you have your own separate loan which are separately secured by the property. This way you avoid the 100% debt/50% rent trap on loan servicing.

It's also worth noting that when it comes to property investors serviceability calculators vary a lot between the banks/lenders. So make sure you're tried loans from lenders with more favourable calculators and make sure you look for a lender with a credit policy which doesn't apply the 100%debt/50% rent approach.

It just underlines the most important issue about using a good mortgage broker - most loan applications are about finding the right credit policy for your needs rather than just looking up a rate table.

Regards
Paul

 

[Nemo30]

I had a similar problem - two existing joint loans with husband, but different investment goals going forward.

One of the brokers on here (Jamie M) sorted me out with a loan from AMP for my next IP.

AMP took into consideration that my husband was paying half of the existing loans and therefore I met serviceability on my own for my next purchase.

 

[Rolf Latham]

If you are buying an investment property jointly with someone else other than your spouse/partner then it's best to look at finance where each of you have your own separate loan which are separately secured by the property. This way you avoid the 100% debt/50% rent trap on loan servicing.l

Hi Paul

As far as I am aware most lenders require a cross guarantee to the other owners loan split, otherwise the mortgage is less useful than a ream of copy paper. The lender cant get judgement on a property where there isnt a clear "permission " given for the loans by all security stake holders.

That guarantee still needs to be declared as is treated by most lenders as a contingent liability.

My line on this is that unless you absolutely cant do an IP by yourself, OR there is a mid term defined exit strategy to avoid joint non spousal investments entirely


ta
rolf

 

[Ergophobia]

Finally I am in a joint ownership situation of a house in Broome WA, worth approx 700k and my portion of the loan is only 150k, but the other owner owes more like 360k. This will be rented out shortly for approx 800-850/week.

I am keen to continue along with my investment opportunities, and have contacted a broker recently to see how I may be viewed for another loan, however, he told me that I am maxed out, and would not be able to get a further loan due to the jointly owned property in Broome, as the bank would apportion the whole dept to me which doesn't make me look good on paper

Perhaps buy out your partner and kill two birds

 

[sanj]

Perhaps buy out your partner and kill two birds

to celebrate the purchase?

is this some weird ethnic ritual practiced north of the river?

 

[Paul Thewlis]

Hi Rolf,
My understanding is that you can have two separate loans with a single security property. (I knowledge that it's a rare loan). Each person is only liable for the repayment of their own loan. In this way you would only include the loan that they are directly liable for in the loan servicing.

Now if things go bad with one of the two loans but not the other the bank can still repossess the property and sell it up. But the bad credit history only goes against the person who defaulted, not the person whose loan was OK. Plus more importantly the person whose loan was OK isn't liable for the others debit. It's because of this last feature that don't have to include the whole debt in the servicing.

Regards
Paul

 

[Rolf Latham]

Hi Rolf,
My understanding is that you can have two separate loans with a single security property. (I knowledge that it's a rare loan). Each person is only liable for the repayment of their own loan. In this way you would only include the loan that they are directly liable for in the loan servicing.

Now if things go bad with one of the two loans but not the other the bank can still repossess the property and sell it up. But the bad credit history only goes against the person who defaulted, not the person whose loan was OK. Plus more importantly the person whose loan was OK isn't liable for the others debit. It's because of this last feature that don't have to include the whole debt in the servicing.

Regards
Paul

and so just for a moment, lets put real people into this scenario

John and Mary

John and Mary purchase an IP together, because their respective spouses dont believe in investment property at all, but John and Mary have been to many many seminars and have pretty much worked out what they are doing, they know the risks, and their respective partners agree they can go into such an investment as long as the default of one, wont affect the other.


John and Mary purchase a property in XYZ for 750 000, with an 80 % loan,

40 % lend on Johns name only and

40 % lend in Mary's name only

There are no guarantees and the only security is the property that has been purchased ( im not aware of a lender dumb enough to accept this scenario, but I dont know all the loan options available in oz so lets continue)

The balance of the purchase price and approx costs of 180 comes from 90 k from each of John and Mary spouses.

Move fwd 2 years.

Mary has separated from her spouse, and she can not afford to make the payments on her 300 k ip loan because her ex has run off with all the assets, and left her with the kids, the PPOR mortgage and the dog, and is chasing her to return the 90 k he has lent her for the external joint investment.

As a result of Mary's default, the bank naturally asks John to see if he will make her payments for her. He says, no way, I was told I didnt need to if she defaulted.

So, approx 120 days later, the bank applies to the court for a judgement against Mary, so the lender can sell the property and recover their now increasing debt. John keeps making his repayments, because he has been advised he cant get into trouble.

At the hearing the magistrate has 2 options

1. Allow the lender possession of the property so they can sell it under the loan and mortgage agreement.

2. John's solicitor claims that he never provided a guarantee or permission for Mary to use his half of the property for security, so they can only sell her half, and asks for the for the lenders request to be parked.


Looking at both potential outcomes

1.
The sunshine coast market has been particularly slow, and the property sells at mortgagee auction for 600k. The total debt on the property is now 700 k due to capped interest and enforcement costs. Technically, your scenario suggests that of the 600 k, 300 k will be used to repatriate Johns debt, and Mary will get to carry the balance of the 100 k.

2. It would never happen.


Im not a legal person, but the concept of partially secured loans on the one shared asset without a security guarantee makes nil sense to me. There are structured ways to get around this in a commercial operation where we are talking bigger fish, but in resi Im not so sure

Maybe someone like TF who chases this stuff daily might like to comment from an operational perspective


ta

rolf

 

[Macca]

Hi Red,

To me your rental returns are extremely low, if a property is valued at $800k then you should be looking at $800 a week rent.

Both of your properties are way below normal value/rental ratios, this in turn effects your income which in turn effects your loan servicing ability.

I would be raising rents on a regular basis until I was somewhere near market rent, this will increase your cash flow and should make lenders a lot happier.

 

[Paul Thewlis]

im not aware of a lender dumb enough to accept this scenario,

rolf

Hi Rolf,
It's a while since I last looked at this strategy but last time I looked at least one of the big 4 was doing this type of loan. For our collective knowledge I'll check during the week if this is still the case.

I know you're not keen on this approach because you've posted about it before and I'm not necessarily trying to encourage lots of people to do it but I think it works well for some - eg Gen Ys. I'd rather see them get into property investing with a friend by pooling their cash/income than waiting and waiting to get into the market and in the meantime spending money on cars and bars.

The key to this approach is doing your finance, legal and financial planning together. When you buy the property get a "partnership agreement" in place which sets the exit and disaster management rules. eg what happens if one person wants to or has to exit.

Also each partner needs to look at cross-insuring the other. eg if one gets hit by a bus the other needs to insure that loan repayments of the other party are covered.

Last point in relation to your scenario- The majority of people borrow joint and severally with their spouses/partners. We have a mortgage management book where we manage post-settlement of loans and so we we've dealt with may cases where divorce occurs. Divorce is messy no matter what your structure. I don't recommend it as a good property investment strategy.

Regards
Paul

 

[Terry_w]

Divorce is messy no matter what your structure. I don't recommend it as a good property investment strategy.

Regards
Paul

Paul, what about the strategy of divorcing so as to transfer interest without stamp duty and without CGT event. Its a good strategy for the advanced investor

 

[Terry_w]

Regarding the mortgage bit.

If the legal ownership is in 2 names then any legal mortgage must be in the same names.

I am not sure how a lender would structure separate loans by each person without taking a mortgage over the whole property. Perhaps the terms of the mortgage agreement would limit the recovery of loan 1 to 50% of the value of the property and loan 2 to the other 50%.

If one defaulted and the bank took possession they could then sell the property and account to the good borrower their 50% share and take all their costs and legals etc from the defaulting borrower.

 

[Peter_Tersteeg]

It's a while since I last looked at this strategy but last time I looked at least one of the big 4 was doing this type of loan. For our collective knowledge I'll check during the week if this is still the case.

I can assure you that there is a big 4 lender that will run the scenario that Paul suggesting. It's done under a very specific policy which was brought in within the last 12 months and flew under the radar of a lot of brokers.

Whilst both loans are with the same lender and via the same application, each borrower is only legally responsible for their portion. The bank does not have recourse against the second borrower if the first defaults.

The bank can or course still force a sale of the property, but the default won't be listed against the second borrower. My BDM suggested that in the few cases they've seen problems occur, the second borrower often helps the first to get up to date as soon as they become aware of the issue.

 

[boomtown]

Perhaps buy out your partner and kill two birds

to celebrate the purchase?

is this some weird ethnic ritual practiced north of the river?

Turducken. Google it.

 

[Token Funder]

Turducken. Google it.

Turducken needs three birds.

Just sayin'

 

[Rolf Latham]

My BDM suggested that in the few cases they've seen problems occur, the second borrower often helps the first to get up to date as soon as they become aware of the issue.

There in lies the reality of the bottom line doesnt it. That action speaks much louder than the printed word. That would not happen often if there wasnt an implied liability.

If you dont defend your equity position by taking on the contingent liability of the other party's arrears you are toast anyways, what your credit file says is irrelvant from a contingent liability POV.

Talk specifically,with a subsequent lenders credit area on what their view is of the contingent liability of the CBA security support policy, and most dont like it.

Dont get me wrong, where the susbequent lender is willing to wear the issue WITH disclosure then all well and good. ( a similar eg is WBC resi not wanting to know about co loans that you are guarantor for)

In the end, my point is it was a nice marketing piece when the policy came out, but its a little on the shady side and provides little real comfort to the non-defaulter.

Perhaps someone that has sold a few of these can provide the legalese, that makes specific statements in the MOM or the loan docs themselves ?

The one very very useful thing is that the policy demands independent legal advice over a range of "possibles" and thus they are doing the borrowers a big favour.

ta
rolf

 

[Red Dust]

Thanks everyone for your replies. Obviously joint loans are a complex area to navigate through. I will certainly follow up with the non-bank leders to see how they may view my situation. In answers to some of the replies:

Ergophobia: can't buy out the other as we are both keen to keep the property

Macca: can't increase rents that much....paretns live in one of the properties and the PM of the other assures me that the rent is in line with the market at present for that suburb.

I will not let this set-back deter me...onwards and upwards or something like that....thanks again appreciate the all the advice and have certainly learned something from this forum.

Red Dust.

 

[Rolf Latham]

Ergophobia: can't buy out the other as we are both keen to keep the property

you CHOOSE to not buy each other out, cant suggests its someone else's power to choose.

if and when it becomes sufficiently imperative that you or your partner be out of this transaction, the choice may be different

ta
rolf