Individual borrowing Capacity AFTER buying using Tenants in Common

[Gennady]

I have really struggled to get a straight answer out of any finance professional about this question. Yet, i am sure it must be such a common predicament that there must be a reliable solution?

I am wanting to buy property with a sibling, obviously we will buy in Tenants in Common. However, i understand this may negatively affect my individual borrowing capacity should i ever want to buy a home with my partner, or invest with someone else. The banks count 100% of the loan but only 30% of the rental income to calculate your serviceability (apparently). I would like to avoid that!

How does one get around this problem? Does anyone have any solid advice, ideas or experience?

 

[Rolf Latham]

Don't is the solution

Almost all lenders bar stg amp and a couple of wee ones maybe take the joint and several liability thing quite seriously

Ta

Rolf

 

[jerrybee]

So in a relatively simple scenario, would Joint Tenants or Tenants in Common be preferable from a financing perspective?

 

[Peter_Tersteeg]

So in a relatively simple scenario, would Joint Tenants or Tenants in Common be preferable from a financing perspective?

Joint Tenants or Tennants in Common makes no difference from a finance perspective (although there are some legal consequences).

The only way to get around the limited rental income and full debt exposure is to not hold property jointly, or to purchase every property (now and in the future) with them.

 

[jerrybee]

Joint Tenants or Tennants in Common makes no difference from a finance perspective (although there are some legal consequences).

The only way to get around the limited rental income and full debt exposure is to not hold property jointly, or to purchase every property (now and in the future) with them.

So what does your run of the mill husband and wife purchase fall under. Isn't it still one of the two? Or is it a different structure?

 

[Terry_w]

So what does your run of the mill husband and wife purchase fall under. Isn't it still one of the two? Or is it a different structure?

It would be if JT or TIC. But not if sole.

 

[Terry_w]

Don't is the solution

Can't get a straighter answer than this.

 

[jerrybee]

So for married couples it's recommended that it just goes under one of their names?

 

[Terry_w]

So for married couples it's recommended that it just goes under one of their names?

Depends on the situation. It could be a disaster in some instances. Imagine owning in the name of your wife, but she secretly sells the property, borrows against it, or gifts it to the rspca.

 

[Peter_Tersteeg]

So for married couples it's recommended that it just goes under one of their names?

If you want to maximise your serviceability, for a husband and wife you simply apply for loans jointly. If you try to purchase jointly and later as individuals, you'll run into the same problems you've initially identified.

Since the two are married, both don't need to be on the title, but combining incomes does maximise affordability.

Terry does raise some interesting points from an asset protection perspective (if somewhat cynical). Easily avoided if you're both on the title, even if it's only in a limited capacity.

 

[Terry_w]

Not only asset protection from loss of control, but there are other issues to consider as well such as asset protection upon bankruptcy, family law separation, incapacity and upon death.

Other considerations are tax planning - imagine having the ability to sell a property when one spouse has no income but the other top marginal rate income. If in both names large tax will apply. If you have one property each you could choose to sell the property owned by the spouse not working.

Estate planning - death - ability to get property in a testamentary discretionary trust for extra asset protection and tax advantages.

Land tax - in some states such as NSW you get larger thresholds over all by buying properties separately.

 

[Jamie M]

The banks count 100% of the loan but only 30% of the rental income to calculate your serviceability (apparently). I would like to avoid that!

That's right. The bank you go next will assign the entire debt to you (despite you really only having to fork out for a portion of it) and only consider a portion of the rent the property bring in.

As Rolf mentioned - AMP and STG are the exception...but you don't want to have to rely on only two lenders (who both have pretty lousy servicing calculators these days).

Cheers

Jamie

 

[Redom]

I believe MEbank do too, haven't tested it though and nothing to change sentiment - not a good idea for future serviceability.

 

[jerrybee]

or to purchase every property (now and in the future) with them.

Ah I see, because 4 properties held by 2 people is the same as 2 people each holding 2 properties. So from a lending perspective it evens out.

I suppose it would be ok to buy some properties separately as long as it was balanced, e.g.

Person A - owned 1 property exclusively, and 3 shared with person B

Person B - owned 1 property exclusively, and 3 shared with person A


The property they each own by themselves cancels each other out, assuming they are of similar value. Does this sound right? Math was never my strength!

 

[tobe]

That scenario would work better where each of them buys jointly from the start.

In practice, a and b meet after they both own a property, they then buy the second and third in joint names, all good.

Its only if they then wanted to buy in single names, or with another partner later that the problems start.

Start as you mean to go on I say.

 

[jerrybee]

That scenario would work better where each of them buys jointly from the start.

In practice, a and b meet after they both own a property, they then buy the second and third in joint names, all good.

Its only if they then wanted to buy in single names, or with another partner later that the problems start.

Start as you mean to go on I say.

Yes makes sense. It balances out as long as it's the other way around - by themselves at first, then joint thereafter. If it's the opposite, then they may struggle to get loans by themselves. All clear now.

 

[Peter_Tersteeg]

Ah I see, because 4 properties held by 2 people is the same as 2 people each holding 2 properties. So from a lending perspective it evens out.

Say each person has the ability to finance up to $500k or property each as an individual, then between them they could finance $1M of property. Their individual limits are now completely used up.

If they then borrow jointly, they'd be able to borrow roughly another $400k as a couple, which they wouldn't be able to do as two individuals. (might not be $400k, it's been 18 months since I did the math and a lot has changed since then).

One of the considerations in lenders calculators is the cost of your living arrangements which is considered a liability. Default figures are used if none is otherwise given. The default figure for a couple is less than the sum of the default figures for two individuals, hence the difference in borrowing ability.

 

[jerrybee]

Say each person has the ability to finance up to $500k or property each as an individual, then between them they could finance $1M of property. Their individual limits are now completely used up.

If they then borrow jointly, they'd be able to borrow roughly another $400k as a couple, which they wouldn't be able to do as two individuals. (might not be $400k, it's been 18 months since I did the math and a lot has changed since then).

One of the considerations in lenders calculators is the cost of your living arrangements which is considered a liability. Default figures are used if none is otherwise given. The default figure for a couple is less than the sum of the default figures for two individuals, hence the difference in borrowing ability.

I see. But if it's two separate individuals (business partners) it would make no difference right.

 

[Terry_w]

Ah I see, because 4 properties held by 2 people is the same as 2 people each holding 2 properties. So from a lending perspective it evens out.

Its not really the same. far reaching consequences because A and B will have different incomes, the properties will be of different values and the loans different amounts. Then there is income tax and negative gearing effects on the loans (less of an issue these days) and the non lending side - land tax, income tax etc.

 

[Gennady]

Surely there must be a way around this?

It is hard to say no to the benefits of an investment partber over potential challenges for future financing, especially because it seems so unfair and non-beneficial for banks to have such ridiculous servicing calculations as 30% of income but 100% of loan.

Really, has nobody ever managed around this problem?