Co-buying property, especially for millennials, is a feasible option when looking to buy for the first time. How, then, do you advise clients who are keen to split the costs with friends?
Property has always been considered a great investment. But for some first-time buyers – millennials in particular – it may be tricky to meet the bank requirements needed for loan approval. Most banks will allow up to four people to apply for a joint bond, however. Co-ownership also means that the loan applicants can share the cost of rates, repairs and maintenance. Nevertheless, there are also a number of potential pitfalls that need to be assessed carefully.
• Credit reports: with any joint bond application, the bank will take every applicant’s credit report into account. If any of the applicants has a poor record, this will impact the interest rate the bank attaches to the bond. Check everyone’s credit records before starting out. Clients can do a free credit check once a year at any registered credit bureau.
• Transparency: everyone needs to be completely honest and open about their finances. If they are not prepared to discuss their current income and expenses with their partners, then co-buying is not an option.
• Legal contract: set down the terms of the agreement in writing so everyone knows exactly what their commitments are.
• Legal advice: consult a lawyer who can help to specify the proportion of each person’s financial interest, the division of costs and how each person will deal with a partner who fails to meet the required payments.
• Exit strategy: what will happen if one of the partners wants to sell their share of the investment? This may require putting the property on the market or refinancing it under the name or names of the partners left. Selling involves costs and there’s no guarantee that the bank would agree to refinance the property.
Steven Barker, head of home loans at Standard Bank, says that – as with any other bond application – if your client does their homework, they can increase the chances of approval.
On home loan applications
1: Clients must supply copies of the IDs for all directors, members or trustees in their venture.
2: Deposits allow the application process to become smoother as it reduces the risk the bank needs to take on. Ideally, the client would need to save for a bigger deposit than normal. For example, they should work towards paying 20% upfront instead of 10%. The bank then only takes on 80% of the loan-to-value risk. “A large deposit undoubtedly weighs the odds in your favour,” Barker says.
3: As a rule of thumb, the bond repayment, taxes and property insurance shouldn’t exceed 25%-30% of the buyers’ joint income.
4: To protect both owners, each partner should keep a record of all documents and payments made that relate to their joint property. As an additional precautionary measure, each partner should include a note in their will to address what will happen to their share of the property in the event of their death.
5: If your client is buying property with a loved one and they are unmarried, one of the bank requirements is that at least one party should live on the property. It is also important that individuals take out joint life cover in the event of one party’s death.
6: Is surety an option? “Only as a last resort and even then, we are moving away from the surety model,” says Barker. Typically, a family member or spouse would offer suretyship – and the banks tend to prefer a joint ownership structure. When someone stands surety, it means that they are undertaking to repay the loan if clients default or are unable to meet the repayments. Previously, this was the equivalent of standing guarantor. However, with the National Credit Act in place, standing surety for someone has taken on greater significance. Careen McKinon, provincial sales manager at bond originator ooba, says the implication is that the surety applicant will be 100% liable. Should they apply for any lending in the future, this mortgage will appear as their liability and it may impact future lending. Should the primary applicant default on the mortgage, the surety will be accountable to service the debt. For example, let’s say Ms Smith wants to take out a R1m home loan. Her brother decides to stand surety for her. A year later, he wants to take out his own home loan for R2,5m but the surety stands on his credit profile as though he has taken out the loan himself. This will be taken into account when the bank is carrying out an affordability calculation
“Set down the terms of the agreement in writing so everyone knows exactly what their commitments are”
Is your client self-employed?
They need to provide the following:
• Comparative financials covering a trading or working period of at least two years.
• A letter from their auditor confirming their personal income.
• If their financials are more than six months old, they will need up-to-date signed management accounts.
• A cashflow forecast for the next 12 months.
• A personal statement of assets and liabilities.
• Personal and business bank statements (six to 12 months, depending on the banks’ requirements). • Latest IT34, which serves as confirmation from Sars that your client’s tax affairs are in order.
• Company, CC or trust statutory documents.
Words Neesa Moodley and Patrick Cairns
Images iStock by Getty Images