How does this Work??

[natedog]

Hey all,
Scenario is this....A loan is secured by a property where it belongs 20% to one party and 80% to another party (on the title). Both parties are on the loan. The question is... if for some reason, the circumstances for the 80% stakeholder go bad ( eg. loss of job, death, inability to service the loan etc) and the property is forced to be sold by the lender, will the lender go after the 20% stakeholder for 100% of its losses (if any) or will they be responsible for only 20% as that is what they own as stated on the title?

Cheers,

Nathan

 

[Sultan of Swing]

Hi Nathan

I'm sure one of the finance people on the forum will answer this better but its my understanding that they'll go after both of you no matter who's on the title.

Take for example, first homebuyer buys a property and mum and dad go guarantor but don't have their name o the title, if the child defaults, mum and dad are responsible for the loan.

The percentages on the title have little to do with the names on the loan. If the 80% owner dies, the 20% owner is responsible for the lot.

I do however stand to be correct.

Cheers

 

[Simon]

SOS is right. You will both be jointly and seperately liable for the loan regardless of the % mix.

Cheers,

 

[natedog]

Thanks Guys,
just spoke to a broker, he reconfirmed what you have both said you wise people

Next question, in my above scenario of 20%/80% split, would it work by putting together a private agreement between the parties saying that if there was a sale of the property that any losses (if any) were to be spread in the 20%/80% split?

The lender will obviously recover their money no matter what, but will this private agreement hold up legally if it is worded correctly and signed by both parties?

Basically could this private agreement be used by the 20% stakeholder to legally recover any loss above this from the 80% stakeholder(obviously if the agreement were worded correctly)

Getting into legal territory here.

Any experts or experience with this sort of thing?

Has anyone done such a thing before?

Cheers,

Nathan

 

[Simon]

Nathan,

Perhaps if you tell us what you are trying to achieve with this plan and why. Then perhaps we can make some suggestions with your goal in mind.

Cheers,

 

[natedog]

Fair enough,
Basically going into an IP deal with parents where they have a 20% stake and we have 80% stake, splitting all expenses and profit in the long term in those percentages.

I want to give them peace of mind, by coming up with some sort of agreement to say that if their is infact a loss on this property due to unforseen events in the short term where the property needs to be sold and there is a loss, we will be resposible for 80% of that loss and they will be for only 20%

Our plan is to hold this property together with parents as an IP for a minimum of 8 years, and then make it the wife and my new PPOR as our family need the added space. We live in a tiny little place now

At this point we will refinance, buy out our parents 20% stake giving them their portion of the capital growth and everyone is happy,

Cheers,

Nathan

 

[Simon]

Do they need to go on loan and title?

Can they borrow their 20% against existing property and "gift" it to you? Or perhaps they have the cash already?

They can then share in capital growth via whatever personal agreement you choose?

Or do you need them on loan for serviceability?

My suggestion above would limit their losses to the 20% "gift" should you go bankrupt etc.

 

[natedog]

Simon,
Thanks for your comments so far, i am pretty sure a lender would need the servicability our parents provide aswell as our own, hence them being on loan and title,

Cheers,

Nathan

 

[asdf]

Hi Simon, Are you able to have the 80% and 20% ownership structure but choose which party takes the loan out? If serviceability is not an issue, as you suggest, then probably best if only one party takes the loan out so as not to limit serviceability for the pther party with the full loan amount against their name. If you put them down as 20% owner with the intention of "buying them out" later on the track, this will trigger CGT and stamp duty issues. As Simon suggested, better off gifting them any profits. But I suppose it depends on your relationship with your parents. A lot can happen in 8 years. Perhaps a business agreement of some kind? I'm afraid you will probably need a lawyer to draft one up. I'd be interested to know whether a promise to provide a future conditional gift can be put in a contract.

 

[APerry]

Hi Nathan,

Yes you can set up some sort of joint venture contract. However, this will not absolve the joint and several liability. Basically, if the loan defaults, the bank will go after whoever, they think it would be easiest to get the money out of.

If the loan defaulted and the bank went after your parents, and they only own 20% of the project, it would be open to them to seek 80% of the cost to them from you. Check this with a lawyer, of course, but I'm pretty sure this is what they will tell you.

Regards
Alistair

 

[natedog]

Thaks APerry,
That sounds about what i had in mind, anyone know a good lawyer?

Cheers,

Nathan

 

[Simon]

Simon,
Thanks for your comments so far, i am pretty sure a lender would need the servicability our parents provide aswell as our own, hence them being on loan and title,

Cheers,

Nathan

Pretty sure is not enough! You need to check exactly as things would be a lot easier without them on title - esp if you wish to be sole owner down the track.

Are you 100% sure no lender will look at you? Get a good broker onto it before you commit. I would be much happier seeing you keeping them off the loan and title if I was your broker.

Even if it is true that there is no lender for you there are options. ie I can suggest a NODOC to get you 70% with no serviceability required at less than standard variable rates. Just an example - not advice!

Cheers,

 

[malpass]

Hi Nathan,

If parents are needed for serviceability but you want to leave them off the title, look at the CBA family equity product. Guarantors can assist with servicing or security or both.

You and your wife are the mortgagors and debtors , parents become the guarantors, keep in mind they will still be liable for the whole debt however.

You might be able to address this by a private agreement between both parties.


Cheers

Malpass

 

[APerry]

Hi Nathan,

I'd be happy to pass on a couple of names to you, is a CBD based lawyer convenient?

Regards
Alistair

 

[michaelg]

Hi,

Is a joint investment or is it a case where the parents are helping out with a deposit?

If its a deposit loan, why not keep it simple and have it that you own 100% of the property and the parents are 2nd mortagees with a 20% mortgage.

Worst case scenario - you're forclosed property is sold, bank gets the lion's share to clear 80% mortgage, balance covers 2nd mortgage, and then parents case you for the rest of your life for the balance.

With the 2nd mortgage you can determine percentage rate, when loan baloons (ie must be paid out in full after 2-5yrs). Pay weekly, monthly, annually etc - interest compounded monthly, quarterly, etc.

That way the "property" and the "loan" is managed separately.

Regards
Michael G