Legal question re:Co borrowing

Can anyone here explain to me what is means in a legal sense if my partner and I are ‘co borrowers’ on an investment loan but I’m only on the title.My partner is in a high litigation profession & It’s been suggested to us to structure the loan this way. I’m not sure what this means from the legal side of things. What would it would mean in the unlikely event that my partner & I were the split too?

Continuing on my journey of learning about property investing....you guys have been great in clarifying & suggesting. Keep it up!! I’m keen to learn.

 

Who suggested it?

There are many legal sides to this question but sounds like you are asking about the asset protection side on the spouse getting sued?
It might provide some degree of protection, but not much if the spouse is paying for the property and by being on the loan that means they are paying for it.

Best to avoid if possible - but not always possible due to servicing.

 

Hi Terry
Thanks for the info. The broker I’ve spoken to suggested it. He also said he has to use our PPOR as security as we are not paying a 20% deposit. However, we could redraw money of our PPOR mortgage (which is just about paid off) to pay a deposit. What are your thoughts on doing this? Will this stop the bank having security over our PPOR? Or do you have better suggestion? Thank you

 

I'd be getting the legal advice from a lawyer and not a broker.

 

It appears that your broker is recommending that you cross collateralise the two properties. From a lending perspective, this is probably a very bad way to go.

Your instincts of redrawing some funds from your PPOR loan is likely a better lending strategy, but probably needs some refinement (depending on how close you are to paying off the loan).

Query why the broker is suggesting using your home as security vs the redraw strategy, but if they are advocating cross collateralisation as a blanket strategy, consider going elsewhere.

 

If you are on title you could lose all equitable rights. Then your partner loses more. Legal advice is prudent

 

Thanks peter. I’ve spoken to the broker today & she said we could re-draw on PPOR mortgage but doing so would cost us at more $ a month as the interest rate is higher on this loan & we’d be paying 2 loans. PPOR has 1 payment left before its paid off. She said that security of PPOR can be released after we repay 20% of the loan value apparently this strategy is for lending purposes & serviceability. I’d appreciate your thoughts. Thank you

 

Hi Paul thanks for the reply. I’m not really clear what you mean. Can you explain this to me please-remember I have my L plates on here!!

 

Is it an owner occ loan or an investment loan? It would be unusual for an investment loan to be cheaper than an OO

 

Investment loan

 

If your PPOR loan is more expensive than the proposed investment loan, your broker should start by simply renegotiating the rates. I'm 99% sure from your comments that both properties will be with the same lender. Even if the current loan is an investment loan, you should be able to renegotiate it to the same rate as the new investment loan.

Getting the lender to reclassify an investment loan against a PPOR isn't that hard either. Don't take this structure on the premise that it's cheaper, something is being missed with that argument.

Based on your comments, the broker is recommending cross collateralisation. The comments also suggest that there's almost certainly a better solution.

Simply waiting for the value of the IP to go up or paying it off manually is a terrible strategy. You'd actually have to cover 25% of the value (the extra 5% is for the purchase costs). In the current economic crisis it may take years for this much growth to occur. Paying it off yourself might be viable and sounds nice, but if you're intending to actively invest, there's plenty of reasons why paying off debt in this manner can be counter productive.


Let me play the devils advocate on why the broker may be recommending cross collateralisation:

1. Cross collateralisation takes less work to implement. Probably not the case here, but the proposed solution is definitely an easy one.

2. Cross collateralisation in this instance means the new loan will be about 25% larger than a simple 80% loan with the redraw option. Brokers are only paid on new loans, therefore the brokers commission will be 25% larger.

3. The proposed structure will make it harder for your to switch lenders in the future. The broker is more likely to enjoy their trail commission for longer.

I am a broker, I am paid commissions, I generally do not advocate cross collateralising loans even though it's usually less work and often more income. In 99% of cases cross collateralising does not favour the borrower. In the other 1% of cases when I do recommend it I'll be very clear with the borrower why that recommendation is being made and what the exit strategy will be.

 

Thanks for the 'insider info' Peter. I appreciate it. The investment loan will be with a different lender. Our plan for this property is to mostly occupy it our selves on weekends and rent it out occasionally as a holiday let in high season.

 

That would explain the pricing discrepancy and it would definitely be more work for the broker to do this properly (and get the same pricing).

Still not a very good reason for cross collateralising though. With the right structure the broker could actually make the same amount (or possibly more) and they could even set things up to accommodate any longer term goals you might have.

 

Generally, the law would take into account contributions. The fact your partner is on the loan means she is notionally liable for the debt (most likely jointly and severally), therefore her 'contribution' is arguably as great as yours.

Title means nothing under resulting and constructive trust law anyway.