Wednesday, October 17, 2018

co ownership 2

Loving a bank isn't something that comes naturally to many people. However, there is one bank as such that you can't help but be infatuated with. That's because this bank already knowns them well, provides deep undivided attention to their financial future and is known for giving more than taking. 

Because this bank knows them so well, they are one of the most trusted in the world. In fact, they are already a client whether they like it or not, because they have been reaching for it and relied on it since the day they were born. 

You know it. I am talking about the Bank of Mum and Dad. 

Parents naturally want to help their kids financially from day one, and not only because they are sick of them living at home well into their 20's and 30's, but because seeing money wasted on rent instead of owning a property is a harsh reality. 

With current housing prices making it difficult for first homebuyers to get their foot in the door of the property market, it is true they need all the help they can get. And it may just be that co-ownership rather than a guarantor agreement could assist homebuyers set their families up for the future while allowing parents to leave a legacy. 

Co-ownership in Australia is generally structured as a tenants-in-common agreement, where ownership is separated to an agreed share. This enables the parents and their children, the first homebuyers, to pass on and leave their share of the property to whoever they wish by naming them in a will. 

So, how do you ensure co-ownership doesn't turn from love into hate?

1. Set your terms of endearment

Co-owning property success requires clear terms from the start. For example, what is the property ownership split? Who repays the mortgage repayments if there is a loan attached, and who looks after the ongoing costs like strata, council rates and property maintenance? What happens if a party's employment changes, or if one party decides they want to sell up? To avoid the possible blow ups, a co-ownership agreement needs to be set out with some of these terms in stone. 

2. Be sure to mind the banks

If a loan is mandatory for co-ownership buying power, obtaining a pre-approval first is a good idea. However, this will mean minding the banks. Applying for a loan with first homebuyers means parents and co-owners will basically need to go through the motions of applying for a mortgage themselves, as a bank will want them to unveil the details of their finances and assets to prove they can service a mortgage should their precious progeny default. Banks will also decide whether the loan qualifies as an owner-occupier loan or an investor loan, influencing the interest rate. A minimum 20%-plus deposit means you will also be able to kiss LMI (Lender's Mortgage Insurance) goodbye. 

3. Shop with your eyes wide open

With parents going in as co-owners, expect logistical challenges getting your strengthened family to inspections and tension over more unwanted opinions on why one person's dream property is another's nightmare. This is completely normal. Also, not that a capital injection from parents suddenly puts higher priced properties in more desirable locations within the reach, meaning things can get out of hand as eyes become too big for bank accounts. Set up a budget and ensure serviceability adds up before throwing in your offer and use the extra assets to build stability rather than stress. 

4. Lay down the legal foundations

The legal aspects of co-ownership are managed by the homebuyer's conveyancer and the vendor's real estate agent while the deposit is taken and the settlement developments. All signatures and the ownership split will be required on the contract of sale. A co-ownership agreement would set out how the buyers will oversee the ownership over time. Keep in mind that first homebuyers with a significant investment from their parents may lose out on government incentives like the first homebuyers stamp duty concessions and all co-owners will be assessed on the total outstanding debt if they ever want to apply for an additional loan. Ideally, now is the time to get your wills updated. 

5. Live the dream

Co-ownership opens a whole new world for those first homebuyers fortunate enough to have parents willing to invest in their financial future and assets. With added financial security enabling them to exit the rental market, it can allow them to build wealth while having the stability of a place to call home. They can also have their mortgage debt paid off quicker if a loan is required. In the end, what is better than a co-owner result of the Bank of Mum and Dad getting paid back in your interest (AKA love) while first homebuyers live out their long awaited property ownership dream?

 

loan

We all know that divorce figures can often look a little frightening to those who are planning to get married. We give an unquestionable 'yes' at the alter that can easily turn into a 'no' down the track - perhaps when the rose-coloured glasses come off and all those imperfections are revealed. 

Unfortunately, Australian borrowers are also finding this applies when working with their personal banking lenders. Due to new regulatory actions throwing a bucket of cold water over financial relationships once entered in passion, borrowers are now under much more scrutiny before lenders settle down and agree to tie the knot. 

Whether they have been a loyal bank customer for some time, or explored their finance options with pre-approval success six months ago, it seems market conditions heading into Spring can turn optimism into rejection. And that - as all jilted spouses or lovers know - only ends in tears. 

In the past, borrowers who applied for credit with their existing lender could rest assured that their finance would likely be approved without question. With all that payment history and loyalty there was rarely a problem in stretching the friendship.

Right now, in mid-2018, this is no longer true. Since 2014, banking and financial institutions in Australia have been encouraged to be much stricter guardians of credit chastity, through a range of measures such as a 10% annual speed limit on investment credit growth, tightened serviceability requirements and metrics, less lending within the interest-only and higher LVR lending segments, and an overall reduced appetite for risk. 

The result? The rules of the finance game are changing. 

Circumstantial evidence is suggesting that banks are currently knocking back existing client applications in droves. Likewise, any client that looked at their maximum borrowing limit six months ago may need to readjust their potential expectations heading into Spring, as the new figure may likely be lower. 

New divided loyalties

Banks are not overly interested in the fact that a borrower has dutifully slaved away for 10 years to pay their mortgage on time. Nor are they focused on customer loyalty, even if a close relationship has been developed over many years with a banking institution in good faith, including your kids' bank accounts and all. 

The conclusions that banks are coming to today are focused solely on your loan serviceability and their lending policy. If the client doesn't fit that policy, their finance application won't be approved. Simple. 

In practice, this means living expenses are now being put under a microscope. Yes, you may be asked for twelve entire months work of bank statements and six month's worth of credit card or personal loan statements. The bank will then be ticking these off line-by-line.

Is a client not declaring some of their actual expenses? Are living expenses high enough to raise questions? This may be enough to confirm they are not even a good fit for their own lender. 

Looking in the mirror

Regulatory action in Australia has seen investor housing commitments come off 27.5% since their peak in April 2015, and owner-occupied refinancer commitments come down 13.1% according to the Australian Bureau of Statistics data. Simiarly, house prices have been falling, with major capital cities hit the hardest. Sydney prices are down 5.4% from their peak, while Melbourne is down 3%. 

As the year goes on, this downward spiral is set to continue. Many economists are forecasting even further falls, and it is clear the strict approach from lenders will continue into the unforeseen future. 

The best way for borrowers both new and old, to remain in this lending game is to keep a close eye on the rules. First of all, borrowers should ensure they keep up to date with fixed and variable rate offers. Often you will find that fixed rates are coming in lower than the variable rate in Australia. In July, RateCity said the average three-year fixed rate was 4.12%, while the average variable rate was 4.28%. 

Be realistic about how banks are likely to view things such as your current lifestyle and spending habits. When they look at your bank statements, what are they likely to see you are spending on? Ensuring you have cleaned up your budgeting, have removed any bad financial habits, and are presenting as financially fit over an extended six-month period, you will make accessing the credit you are applying for much more likely. 

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Contact Details

Zippy Finance 

PO Box 3078
North Turramurra
NSW 2074

T 1300 855 022 

Louisa Sanghera is a credit representative (437236) of BLSSA Pty Ltd ACN 117 651 760.  Australian Credit Licence 391237. ABN 85 168 278 975.

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