Loan Tip: Co-Borrowers, new requirements

A new Code of Banking Practice is coming out on 1 July 2019. The Code is a voluntary rule book for the banks-It is not legislation.

From the Australian Banking Association:

The Code sets out the banking industry's key commitments and obligations to customers on standards of practice, disclosure and principles of conduct for their banking services.
Banking Code - Australian Banking Association



The new section of the Code relating to Co-Borrowers says:


"Lending to co-borrowers

53. If you are an individual applying for a loan, or an increase to a loan limit, paragraphs 54 to 56 apply to you.

54. If, on the information that you have provided to us in the course of applying for this loan, you will not receive a substantial benefit from the loan, we will not approve you as a co-borrower unless we:

a. have taken reasonable steps to ensure that you understand the risks associated with entering into the loan, and understand the difference between being a co-borrower and a guarantor;

b. have taken into account the reasons why you want to be a co-borrower; and

c. are satisfied that you are not experiencing financial abuse.

55. A substantial benefit includes where:

a. you acquire a reasonably proportionate legal or equitable interest in assets purchased with the loan funds; or

b. a reasonable portion of the loans funds are used to repay your debts, or other obligations owed by you.

56. You may end your liability under the loan by giving us a written request to do so in the following circumstances:

a. where credit has not been provided or relied upon by any co- borrower; or

b. for any future advances under the loan, where we can terminate any obligation we have to extend further credit to any other co-borrower under the same loan.

57. Paragraphs 53 to 56 do not apply to borrowers who are trustees, companies, directors of co-borrower companies or partners in a partnership or joint-venture arrangement.

We will tell you about our suitability assessment for a loan

58. If we approve your loan, and it is regulated under the National Consumer Credit Protection Act 2009, we will let you know that you can obtain our assessment about whether it is not unsuitable for you."

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There will be changes to the ways in which banks lend to joint borrowers who are also not joint owners or who are joint owners in low percentages.

A borrower must be seen as getting a substantial benefit from the loan. This can be shown by the borrower being a legal owner of the property. NAB have indicated that 25% ownership or more is going to be acceptable. Westpac are indicating 30%.


What does this mean for 90/10% owners or even non-owner borrowers? I think it will be difficult to get a loan through as a borrower, unless you can demonstrate that the smaller owner will benefit more from the loan than their legal ownership – such as a 90/10 ownership structure is jointly borrowing against property A, but will be using the funds for Property B which will be owned 50/50.

The alternative to co-borrowing is to act as a guarantor. So someone with a 90/10 ownerships structure could still potentially borrow, but person A who owns 90% might need to be the borrower with person B who owns 10% being a guarantor to the loan.

This has slightly different legal consequences, but basically both will still be liable for the debt in the event of default.

Tax consequences could change however. It is likely the ATO will see a few private ruling applications, relating to this.

 

Crazy stuff for spouses.

 

When I saw this come through a few weeks ago I thought it was quite ridiculous. Today I was at a presentation and I can see where they're coming from.

In the example given, a couple approached a broker for a loan. They applied jointly but it turns out that she had some defaults on her credit file and the loan was declined.

Easy solution, apply in his name only. He has clean credit, decent income, the deal works. The only thing is that she won't be on the loan or the title of the property. To make the deal service, they also pay out a personal loan of his.

Sounds like a fair solution so far...

Some time later, he gets into trouble, goes to prison, they separate but she's still living in the house. As she's living in the house she contacts the bank to handle the mortgage repayments but as she's not on any of the documentation, they won't talk to her at all. The loan soon defaults and she's evicted.

As these things happen, she complains, eventually it comes back to the broker. She's now claiming the deposit she put in and the $50k funds for the personal loan that was paid off. The broker is on the line for $275k.

The ombudsman agrees with the broker that the deposit is recovered from the sale of the property, so they're off the hook for that. However the payment of the $50k loan was on the brokers advice, so the broker has to reimburse this.

Madness really, but it does give some insight to where this sort of thinking originates.

 

Wow. I think that decision stinks and is opposite of the anti co-borrower policies coming out. She is not liable for the loan as is not the co-borrower / co-owner. The fact that she gifted the husband $50K is a matter between them! Just wow.

 

What tax consequences are you expecting to change Terry and what kind of applications?

 

deductibility generally follows the legal ownership. But if one owner is not borrowing there could be issues.

 

I know this is an older thread now, but can anybody give an update as to how strictly banks have implemented these guidelines? I'm thinking about buying a PPOR in wife's name but using my income to service the mortgage. Spouse has no income, LVR would be 50%. Thanks.

 

If her income is not needed then she doesn't need to be on title or the loan. She wouldn't need to be a borrower or a mortgagor.

 

Appreciate the replies so far. There's two reasons why I want her to be the sole owner:

1) I'll likely be running a business from home later on so I want to retain the ppor cgt discount when we (she) eventually sells.

2) I won't be living in Australia for the next few years, so I want her to be able to get the full ppor land tax exemption. With that in mind, would the banks be okay with this situation (mortgage arrangement+income earner being non-resident) assuming I can satisfy the usual servicing requirements for Aussie expats?

 

Oh, you want her to be the sole owner. I misread it.
She would need to be on the loan as a borrower and you would need to be a borrower or a guarantor for servicing. If you are a non-resident income earner it would be still possible to do, but depend on a few more things.

 

Thanks, much appreciated!