Got some savings, want to start in property but can’t afford a home loan on your own? You are part of a growing trend of Australians who are seeking out home buying ‘partnerships’ to get into the property market. We look at how this is happening, and what you should be aware of to protect your clear credit file when entering into this type of joint debt arrangement.
By Graham Doessel, Founder and CEO of MyCRA Credit Repairs and www.fixmybadcredit.com.au.
In Broker News yesterday, it was noted there has been an increase in the number of first homebuyers partnering up to buy property. BN reported research from Mortgage Choice revealing up to two-thirds of first homebuyers will be planning to buy with someone else. De facto couples, friends, relatives and even work colleagues have been entering into home buying partnerships to be able to afford property:
“Sharing a home loan commitment with one or more people provides borrowers with the opportunity to split the cost of the property and the associated expenses, so that loan repayments are noticeably less than what they would be if they were buying solo. Another benefit is if the combined funds equate to a deposit of 20% or more of the purchase price, it will negate the need for lenders’ mortgage insurance,” company spokesperson Belinda Williamson said.
But with those benefits come some things to be wary of. Some of us are great with money and some of us aren’t. If one of each type get together – the potential for both to be financially damaged is greatly increased. As credit rating repairers, every day we meet people who need help with fixing credit rating issues due to the financial shortcomings of a partner.
When de-facto couples decide to take out a home loan together, as with married couples there can be many ways that joint debt can go wrong. Living together can increase the risk of credit file damage, just through the sheer volume of credit accounts that one or the other or both needs to be responsible for. The lines can get blurred, and if things go bad, joint debt can be difficult to fix. Very often one partner ends up with a bad credit score, simply because the other person on the account has not made repayments to the account. Often people are unaware their partner is generating defaults on their credit rating until it is too late. They apply for credit in their own right and are refused.
Family joint debt can go really well, or really badly. There is generally a large element of trust. But as with de-facto couples emotion can get in the way of good business sense. People can make promises out of love without official documentation. If things go badly, it can not only damage the financial futures of the parties involved, but break down the family.
Friends and work colleagues
If the financial relationship is ‘strictly business’, it may be easier to separate the home loan from all other credit the individuals may possess. This is especially true if the property is purely an investment and neither person is living in the property.
What happens if it all goes wrong?
When we take out a home loan with someone else, and even rates, utility and phone accounts, we are very reliant on the partner to keep up their end of the credit repayments.
A bad credit score due to a default (late payment of account past 60 days) lasts for 5 years, a ‘clearout’ listing is 7 years. During this time it is near to impossible to get another home loan, or credit card, or even a mobile phone plan while this negative entry appears on your credit report.
So many times we hear clients say “I’m not sure how this happened – how can my clear credit file be damaged by something someone else did?”
Unfortunately with any joint debt, both credit files are at risk if repayments aren’t made.
How can I cover myself and my credit file?
Here are some ways we can enjoy the benefits of getting into a home loan partnership without the pitfalls that could crop up for our credit file:
1. Know about your new financial partner’s past credit history. People will do what they have always done. If they have financial skeletons in the closet we should be wary about leaving our credit rating at risk.
2. Ask what debts they currently have. This will give you an indication of how they feel about money, and how much debt they consider normal to handle. Does this match with yours?
3. Talk about paying bills. Do they always pay them on time? If not, why not? This will give you a good indication of how this person regards money and credit repayments.
4. Ask what their financial goals are for the future. Do they match yours? If you intend to hold on to the property whilst the partner intends to sell in a few years to repurchase, are you prepared to pay them out? Will anyone be living in the property? How will you divide expenses on the property?
5. Verify their answers about existing and past debt. Ask them if you can see a copy of their credit file. A copy of your credit report is free every year from one or more of the credit reporting agencies in Australia. It will be sent within 10 working days.
“Clearly putting the ground rules in place from the start, preferably with the assistance of a solicitor drawing up a formal agreement, will go a long way to ensure all parties acknowledge their responsibilities and agree on unexpected contingencies,” Mortgage Choice’s Ms Williamson said.
7. Leave emotion out of it. As much as you may be friendly with or even love the person you are buying the property with – people fall out. As much as possible try and detach your emotions while entering into the ‘business transaction’ you are making, so that if something does go wrong between you, your clear credit files remain intact.
For more information on fixing bad credit or protecting your credit file, contact us at MyCRA Credit Repairs on 1300 667 218 or visit the main website www.mycra.com.au.