One of the biggest hindrances to a successful home loan application, particularly for younger and first-time home buyers, is a high debt-to-income ratio and low credit score rating. Many do not have a credit rating at all and thus are unable to open an account. Without an account in good standing, there is no means to prove an individual is a good credit risk. This vicious circle can delay many plans and dreams of a home purchase, which is particularly sad in the current climate of being able to avail of the best interest rate in years.
There is however, a possible solution: When you add a co-applicant that does have a good credit rating and has the capacity for a repayment, the odds of a successful approval for a home loan become so much better. Such a co-applicant may be a long-term partner, a friend, business associate or even a family member.
Before rushing into a joint home loan assessment process, there are some legalities to consider, and the first is that contrary to popular belief, South African laws do not recognise so-called ‘common law’ relationships.
I approached Louis Kruger for clarification. He is an Attorney, Notary & Conveyancer, and Managing Director of Kruger Attorneys & Conveyancers, who explains that traditionally the consequences of married persons owning a property are usually governed by their matrimonial property regime, such as being married in community- or out-of-community, customary marriage, religious marriage or civil union.
“The law dictates, dependent on the regime, what the proprietary consequences are for the respective spouses or partners. Persons in a personal or romantic relationship, or same sex partnership however, which is not recognised by law, cannot rely on the same legal protection that the law provides to married persons.”
It is for this reason that Kruger stresses that the future aspirations and relationship between the parties is of great concern. “I always strongly recommend that unmarried persons who wish to purchase a property jointly, must enter into a ‘Co-Ownership or Co-Habitation Agreement’, which helps to regulate their affairs. These agreements generally provide for important aspects such as liability for acquisition costs, maintenance, what happens to the property when the relationship is terminated, or in the event that either party wishes to sell. This agreement will be enforceable between the parties, but will not bind creditors such as the bond holder.
“It is imperative for the parties of such an agreement to understand that should one of them parties no longer wish to remain a co-owner, the remaining owner can only ‘buy-out’ that partner if they are capable of proving affordability to the bank for the full bond amount outstanding,” says Kruger.
From the bank or financial institution’s perspective, if one applicant wishes to exit from the home loan agreement, a substitution of debt is implemented, whereby a new home loan application will need to be processed and a full credit assessment to be conducted to verify affordability. That applicant will then become liable to pay the full bond registration fees for the new home loan.
This drives another of the major legal considerations by joint owners of a property who are utilising mortgage bond finance to purchase a property; that being the effect of both being held jointly and severally liable for any amount due to the financial institution granting such a home loan. Here the law is very clear: Regardless of whether only one individual defaults, both parties' credit profiles are impacted.
In practice, this means that the bank can claim any amount due from both, or either, of the parties and the bank is not bound by their personal arrangements relative to payment,” says Kruger. “For example, if the parties agree that one of them is responsible for maintaining the regular bond instalments, whilst the other will cover municipal costs and insurance, the bank is not bound by the same agreement, and can insist on payment from either party.
The decision of which financial institution or bank to apply for a home loan, also has to be decided up front. A bond application cannot be split between two different home loan providers, and the monthly debit order has to come from one account. This may put the financial burden on one party who has to ensure that bond repayments funds are always available.
Absa Home Loans confirms what Kruger has already alerted us to, which emphasises that by law, joint applicants have to accept that they are jointly and severally liable for the total monthly home loan repayments, and which includes taxes and other legal and administrative fees that are associated with the ownership of a property.
Another consideration that Absa Home Loans stresses, is the need for each party to have a Last Will and Testament in place, which instructs what should happen to the property in the event of one another’s death. One additional step is also for both parties to have adequate life cover that will settle their share of the outstanding bond.
In the excitement and realisation that together, two parties can afford a property, joint applicants tend to focus mainly on the benefits of pooling their cash resources and affordability, not giving sufficient consideration to the downside impact if things don’t go as planned; death and taxes for example.
Before making a joint home loan application it is highly recommended that both parties explore all eventualities or possibilities no matter how difficult it may be, especially when considering a possible future termination of the relationship. Attorney advice is always recommended because they take an unemotional view of the partnership and are aware of all the legal pitfalls, proffering advice and options.
The consequences of not doing so, and/or not having adequate legal advice, can have serious implications on individual credit ratings and future loan applications, which in turn can set both individuals back for years, regardless of who defaulted or reneged on the co-ownership agreement.
A golden rule is in the word ‘joint’: You are jointly liable, jointly bound to the home loan, and jointly you will thrive or fail.