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Joint and Severally Liable: What Banks Expect When You Buy with Others

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Most people buy a property with their partner.  Some people buy with a friend.  Some with a brother or sister.  Great idea as pooling deposit and more income gets you a property you couldn’t buy as a single person.
 
Buying with a spouse it pretty straight forward, you are buying with a common goal and will make common decisions as to when to sell etc.  
 
Buying with someone not your spouse, like a friend or relative, means you need to have another level of conversation about what happens when one of you wants out. This requires discussion about some more points, for example: Can either of you afford to buy the other out. If you decide to sell, how do you work out the fair value?  What if you can’t sell? What if one of you loses a job? How do you divide up the sale proceeds to reflect the fair value of what was contributed up front and along the way?  These and other scenarios should be addressed up front so everyone is clear and can even be documented formally by a legal person if so advised.
 
Whenever you buy a property with another, your spouse for instance, or with a friend/relative, the contract you sign with the bank states that all parties are “Joint and Severally Liable”.  Practically this term means that you are 100% responsible for the loan and so is the other person on the mortgage.  Both of you are 100% responsible.  Simple.
 
But this also means if one of you can’t or won’t pay your share, the bank expects other person to pay for all of it.  Following this through, if a default happens on your loan because of the other person’s actions you still get the default.  Not fair, but that is the reality of the contract you sign.
 
And there is another consequence of this clause.  Let’s say you are happy with this first investment property bought 50%50% with a friend, but want to buy another by yourself.  When you do your figures, you take into account the 50% of the loan repayment and 50% of the rent and then workout if you can afford the loan and repayments for the next property.    When the bank does your figures they take into account the 100% of the loan repayment and only 50% of the rent and then workout if you can afford the loan and repayments for the next property. 
  
Did you see that? The bank is burdening you with the entire first loan but still only your 50% of the rent.  Clearly this means you ultimately can borrow less for your subsequent purchases.  

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Catherine Lezer

Property is Catherine Lezer’s passion. She owns nine properties of her own and has a fundamental understanding of how the property market works. 

“I’ve bought some great properties and some ‘bad’ properties, and even the bad ones have made me money,” says Catherine. “Property is the most reliable way to make money that I know!”
 
“I’ve purchased, sold, tendered, offered, negotiated, won and lost at auction, developed and renovated so I understand what happens out there in the market,” she adds. “Being able to help other people finance property is an added bonus for me.”
 
Originally from Perth and now based in Sydney, Catherine joined Smartline in 1999 with over 25 years of banking experience and qualifications include a Bachelor of Business and an MBA. Catherine has helped hundreds of clients finance houses, semis, terraces and apartments, with the majority of her business coming from word of mouth referrals.
 

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