family, friends & loans rarely mix
With housing affordability issues on the rise, a common thought is to turn to family & friends to share property ownership. A common scenario… You’ve found a dream property that’s just out of reach. An investment property or holiday house perhaps. And you’re not the only one who loves it. You start sharing ideas with family or friends about how pooling resources could make it all come true. Because, what could possibly go wrong?
Then fast forward 5 years. Your friends have started a successful new business, and you’re ready to upgrade your own home. No problems, right? Well maybe. From a loan servicing perspective for your new home, many lenders will consider you 100% responsible for the full investment loan amounts but only credit you with 50% of the income. The first port of call is to look for a lender with a “common-debt-reducer” policy, that allows 50% of the loan repayments (ie the actual repayments). However whether they will accept the income from your friend’s start up business is highly questionable. That could create a big dent in how much they’ll allow you to borrow for your new home.
That was a rosy picture, with a potential problem that could probably be worked through. But what about a less rosy, and more common scenario. It’s time to refinance your own home. The interest rate has blown out, or you’re keen to undertake some renovations. You also own an investment property with your brother. If either of the these scenarios are true, you may hit brick walls, so find the solution to be more expensive than you’d think:
Your home is also security for the investment property. You can’t refinance your own home without also refinancing it, and your brother’s not in a position to do that.
You want to access as much funding as you can, but your brother’s family situation is anything but perfect. Common-debt-reducer is out, so from a servicing perspective you’re weighed down by 100% responsibility of the loan repayments, even though you only pay 50%.
We haven’t even touched on Parental Guarantees or Guarantor Loans where parents and their children’s financial affairs become highly dependent on each other, or scenarios where family conflict already exists. The bottom line is, it’s difficult to predict the future. But as lending policy tightens, banks are increasingly cautious of any co-borrower arrangements outside of normal household relationships. So expecting complexity (and price) to come with any new or existing arrangements, is a worthwhile mindset, as it might just steer you in another less complicated direction from the outset.
With over 25 years’ banking & financial services experience, Lanie Conquest at Surf Coast Finance helps local families & businesses make smarter financing decisions.
M: 0418 938 646