*This article first appeared in our Property360 digital magazine
Buying a property with a partner, friend, or relative can be a good way to take the first step on the property ladder or start an investment journey.
But you need to be sure you know what this entails and how to protect yourself, your relationship, and your investment.
Just as in an individual bond application, parties entering into joint purchasing need to get their financial lives in order. If any problems exist with one applicant, the entire home loan application will be declined.
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Both parties therefore will need to polish their financial profiles, says Ria Venter, regional manager for Rawson Finance.
• Ditch the debt
Debt is one of the first things banks look at when it comes to assessing bond affordability. It doesn’t matter how many applicants there are – any bad debt will count against you. To qualify for the largest bond at the best interest rate, Venter recommends getting rid of any unnecessary store cards, credit cards and loan accounts. If you can tighten your belts to pay off things like car loans, that is even better.
“Ideally, you need as few expenses coming off your bank accounts each month as possible. This shows the bank that you have sufficient disposable income and that each of you is serious about your financial health.”
• Put your best foot forward
Chances are one person’s financial profile will be stronger than the other(s) on a joint home loan application. Whether that’s because of a higher income, better credit record or more stable employment, it makes sense to play up those strengths.
“It’s smart to make the most attractive applicant the primary applicant on your joint home loan. Think of it as putting your best foot forward to give the banks a good first impression.
“It’s not going to make up for any serious black marks on other applicant’s records, but can help boost your overall profile enough to encourage lenders to come to the table with their best offer,” she says.
Most joint buyers will usually get an attorney to draw up a detailed co-ownership contract before they apply for a home loan, says Carl Coetzee, chief executive of BetterBond. But note that such a contract carries no weight with third parties like banks and municipalities.
This does not mean that a professionally drafted contract is unnecessary. In fact, if you do not have one it will automatically be presumed in law that each signatory has an equal share to the property, which might not be the case. And this is how the title deed will be registered at the Deeds Office.
Who pays for what
There are a number of costs involved in buying a property, beyond your basic bond repayments. These include once-off expenses like your deposit, transfer and legal fees, and ongoing costs like insurance, maintenance, rates and levies, says David Jacobs, Gauteng regional sales manager for the Rawson Property Group
“It’s obviously very important to know how much you can each contribute to bond repayments but, you’ll also need to assign responsibility for the rest of the costs associated with your purchase and property ownership.”
Who owns what
Most co-owners match their ownership proportion to the proportion of costs that they cover. For example, if one partner commits to paying 70% of the expenses, that partner will usually receive a 70% share in the ownership.
“Just remember, the default division of ownership on a shared property purchase is 50/50. If you want something different, this needs to be clearly specified in all the applicable documentation,” Jacobs says.
Although the share of the property that is owned by each purchaser can be stipulated in the title deed, and then registered at the Deeds Office, Coetzee says the banks will always want both or all parties to sign that they will be “jointly and severally” liable to repay the loan. In their eyes, it's a collective commitment. This means the bank is entitled to recover the debt from all the debtors, in proportion to their share. “Or, if necessary, the bank can recover the whole amount from any one of the signatories.
“So, if one co-owner falls on hard times and stops paying for some reason, the others will have to make up the shortfall.”
If the remaining owners don't bridge the gap and the loan then falls into arrears, the bank can “call up” the debt and demand that all the owners, or just one, settle the debt, at the risk of having the property repossessed. This is the same procedure followed by municipalities concerning rates, water, and electricity accounts.
Who lives where
Whether joint owners will be living together in the home – as would probably be the case of romantic partners – or if it has been purchased as a rental investment property, Jacobs says this needs to be clearly stated in the co-purchasing agreement.
“If only one of you will be living there, will that person pay rent for the privilege? Will this affect the division of costs like rates, levies and maintenance? If you’re planning to rent the property to a third party, you’ll also need to consider the responsibilities of managing tenants and how you will split the rental income and/or costs.”
Echoing Coetzee, Leonard Kondowe, national administration hub manager for Rawson Finance, says if one party in a shared bond finds they are unable to cover their portion of repayments, the other bondholder or bondholders will be held liable for the shortfall by their lender.
“It’s always best to have a clear procedure for recovering these costs fairly, and handling any situation in which the other bondholders cannot cover the extra expense.”
In this event, he recommends bringing the lender into the loop before resorting to desperate measures.
“Banks are very understanding and willing to compromise to help bondholders through tough times.”
Kondowe adds that bond insurance can protect against unforeseen financial challenges, covering bond repayments for the policy holder in the event of death, disability, loss of income or dread disease.
Time to sell?
It is vital for the co-ownership contract to spell out what will happen if co-owners go their separate ways, Coetzee says.
“Problems can and do occur if one co-owner wants to sell but the others don't, or if, sadly, a co-owner dies. There should be some sort of opt-out clause in the contract so that if someone wants or needs to sell their share, the remaining co-owners will have first option to buy.”
He says the contract should also include the option of not buying out a partner’s share. It should stipulate that the whole property has to be sold and the proceeds divided according to the original shareholdings.
Jacobs adds: “Don’t forget, you’ll also need to agree on the division of costs – compliance certificates, last-minute repairs, and estate agent’s commission, as well as any profits from the sale.”
It is also “very important” for co-owners to each have a last will and testament specifying what happens to their portion of the property investment in the event of their death, he says.