Rhys Dyer | CEO | ooba Home Loans | mail me |
The journey to joint home ownership can be an exciting one and may improve your chances of being approved for a home loan. However, whether you are financing a home as a couple (married or unmarried), as business partners or even as friends, a home loan is a serious and long-term financial commitment.
For this reason, it’s crucial to understand the ins and outs of joint home ownership and weigh up all of the various implications to determine whether this option is the right fit for you.
What is a joint home loan?
A joint home loan is a bond that is guaranteed by at least two parties. In fact, in recent years, it’s become possible to have as many as 12 people on a single home loan.
In the case of a married couple, the financing of a home will depend on the type of marriage contract that the parties entered into. For those married in community of property, a home has to be purchased jointly. For those married outside community of property, partners can decide whether they wish to purchase the home jointly.
In deciding whether to approve a joint home loan, the banks will assess both (or all) parties’ affordability and credit scores prior to making the final decision. And it’s important to note that while a joint home loan is split between co-home owners, by signing into a joint home loan, you agree to become responsible for the entire bond should one party default.
In terms of what’s required when applying for a joint home loan, the banks will assess both parties’ proof of income, bank statements, credit scores and affordability.
The pros of joint home loans
- Less risk: Applying for a joint home loan signals a lower risk level to the banks. Having two or more parties on a home loan reduces the banks’ chances of being let down on home loan repayments.
- More affordability: Having two or more incomes pooled together means that potential joint homeowners can shop in a higher price bracket and that there is more of a buffer against the extra costs when interest rates go up.
- Bigger deposit: Joint homebuyers have the ability to put down a bigger deposit as a collective. Monthly instalments payments are more affordable when a fair-sized down payment is made. Here, the bank will grant the home loan at a more favourable interest rate than a zero deposit home loan – making the cost of borrowing even more affordable.
- Split purchasing costs: These are the obvious benefits of joint home ownership as both parties agree to take on equal financial responsibility. Beyond bond repayments, this is particularly useful when it comes to covering the costs of bond registration and transfer costs, home loan and property insurance, as well as general home maintenance costs.
The cons of joint home loans
- Approval process: You will only be approved for a home loan if all parties’ income, affordability, and credit scores meet the banks’ requirements.
- Joint responsibility: If there is a default on the home loan, both partners’ credit scores are negatively affected. If a partner chooses to withdraw (and despite the circumstances), the other will be responsible for the full monthly home repayment. In this case, the banks will run an affordability check on the remaining home owner and draw up a new contract should they still meet the requirements.
- Splitting up: Addressing the elephant in the room, in the case of divorce, the divorce order will determine how the joint asset (home) will be dealt with. In some cases, it may be specified that the property has to be sold and that the profit must be split between both parties. In other cases, one of the parties will be entitled to the property and the property will need to be transferred into their name. The bank who holds the existing bond will need to consent to this based on the person’s affordability.
Happily ever after?
Naturally, the journey to joint home ownership can be daunting in the beginning as you get all your paperwork in order, determine your affordability and shop around for your dream home.
Here are the following tips for planning and budgeting before applying for a joint home loan:
- Open a joint savings account: We encourage all potential homebuyers to save, plan and budget accordingly. In a case where there are two or more people involved, it’s also advised that you create a shared savings account and each put in an equal amount each month, prior to applying for the home loan. This is a great opportunity to save for a deposit collectively. Pool your resources and learn what it’s like to be financially accountable together.
- Speak openly about budgets: Speaking openly about your finances can be tricky, especially in a case where the applicants are not married to one another. However, the home loan process requires a high level of transparency between parties. The banks will request personal documentation from each of you, and therefore, it’s a good idea to share your budgets and affordability before beginning the process.
- Share a vision: Every person has different tastes and when it comes to shopping around for a home, different things will appeal to each of you. For instance, one might feel strongly about modern finishes while the other might be happy to opt for a ‘fixer upper’. Chat openly about your home wish list and expectations prior to shopping around to save yourselves time and avoid potential disagreements.
- Create a formal agreement: In this agreement, stipulate the percentage contributions and ownership, how maintenance costs, rates and taxes, and home improvement costs will be split. Ask yourselves questions such as: “What happens if one of us wants to sell their share of the property?”. All parties should have their wills drawn up to instruct on what must happen to the property in the event of their death.
- Get your paperwork in order: Working with a home loan comparison service gives you the upper hand. Our bond indicator allows you to check your credit score and what you can realistically afford. From there, we work with you to get your paperwork in order and will apply on your behalf to all the major banks to ensure that you receive the best possible interest rate.
Transparency, trust, and communication go a long way in ensuring that things run smoothly throughout your joint home ownership journey.