What's really at stake when you borrow with others?

Get clear on what's at stake when you borrow with others

Understanding 'joint and severally liability loans' and what it means for you.

You might think when you take out a joint mortgage with someone else you’re only responsible for your ‘half’ or share of the loan.

Think again because this is not the case.

• By signing a mortgage contract with someone else, you’re each agreeing to pay off the whole debt if the other can’t – or won’t – pay it.

Read in this article

Pro Tip: A key phrase you must get to know is joint and several liability and you need to know what it means for you and how to protect yourself.

Buying a property together

Buying a property with your partner is usually straightforward. Combining savings into a single larger deposit can help you both get into a fast-moving property market or reduce (or remove) the need for hefty lenders mortgage insurance (LMI) fees.

But the complexity increases when you buy a property with a friend or with a brother or sister.

It becomes even more complicated when you buy a property in a Self Managed Super Fund (SMSF).

• Buying a property and taking out a joint mortgage with your partner is usually straightforward because you have a common goal to live in the property.
• But when you’re buying a property with multiple people, such as a sibling, a parent or a friend (or a combination) you’ll all need to have a bigger conversation with everyone involved to agree on what happens when one of you wants (or needs) out.

Have the joint mortgage conversation

Whenever you're about to become a co-borrower you must first understand the legal position you're getting yourself into and agree together on the practical details.

This frank conversation needs to cover issues like:

• Know whether either of you can afford to buy out the other(s) if needed.
• If you later decide to sell, how will you work out and distribute the fair value?
• How will you divide the sale proceeds to reflect the fair value of what was contributed up front and along the way or the initial deposit that made it possible in the first place?
• Who's responsible to keep the property insured and in good order?
• What's the ownership structure you’ll use to hold the property - tenants in common or joint tenants?
• Will all the parties to the loan be jointly and severally liable?
• If so, will you use joint and several insurance to protect each borrower from the full debt, or just their portion of the ownership?
• What if you can’t sell later or can’t sell at the price you’re hoping to get?
• What if one of you loses a job or gets sick or injured in a car accident and can't work for a while?
• What happens if one of the joint borrowers suffers a sickness or accident that requires expensive medical costs or needs to move into aged care?

Make your decisions legal

There are many different scenarios to discuss and you should try and talk about all of them.

• List what you have discussed and what you have agreed upon.
• Nominate using a mediator in the future if required, just in case you reach an impasse and need to get the help of a third party to talk through a decision.
• Keep the master copy of key documents filed with the lawyers.

We also suggest you make a signed legal agreement that records your commitment to ‘act in the best and fair interest of all parties’.

So who is left carrying the joint mortgage?

The answer is Everyone.

The joint mortgage contract will have a legal clause making all borrowers joint and severally liable.

• Whenever you buy a property with another, your spouse or with a friend or relative, the mortgage contract you sign states all parties are joint and severally liable.
• Practically this term means you are all personally, and jointly 100% responsible for the loan.

All of you are 100% responsible. Simple.

And just so everyone is clear

This also means if one of you can’t or - won’t - pay their share, the bank expects the other person (or people) to pay for all of it. This also means if a default happens on your loan because of the other person’s actions you still get the default listed on your own credit file. Maybe not fair, but that's the reality of the joint mortgage you sign.

What's the effect of a joint and several loan when buying a second property?

There is another consequence of this clause in your home mortgage.

• If you later want to purchase an investment property, when you're calculating what you can afford, because you already have a joint and several mortgage liability, you are assumed to already be responsible for the entire 100% of the first mortgage, not just your portion.

This means co-ownership of a property with a mortgage can significantly reduce your own future borrowing power. Ultimately can borrow less for any subsequent property purchase.

What happens if you break up?

If you break up with your partner, and you’re still a co-signatory, guarantor or joint borrower to a mortgage, expect to be held liable for any debt with a joint and several clause in the loan agreement.

What happens if one person dies?

If your partner or a co-borrower dies, you will still be held personally liable for any or any debt that has a joint and several clause in the loan agreement.

Pro Tip: How the ownership structure was initially set up now determines if their share of the value in the property goes to their estate (their will), to be split up or simply passes to the surviving joint owners and never falls into their estate to be challenged by others. The bottom line - any joint debts mean joint responsibility and liability.

Reading recommendation: ASIC has a useful article about this issue called Love and Loans you can read here.

How do you protect family borrowers from a joint and several mortgage debt?

So how do you protect the joint borrowers in a family, especially if one of them doesn't work?

The life insurance industry traditionally had a difficult time recognising the value a homemaker brings to a relationship and limited the amount of life insurance a homemaker (howbeit not working by choice) could apply for to $1.5 million life insurance.

• This creates problems for a typical two-parent household with two kids and a 2 million dollar mortgage if one of the adults is a full-time homemaker.
• This can create a problem for partners doing extensive renovations on a property where one adult is not working but full time managing the renovation, while their partner continues to work.
• If the debt is a joint and several mortgage, both working and non-working borrowers are still liable of the entire debt of $2,000,000.

The solution might be a specialised life insurance policy designed to recognise and insure joint and several liability mortgage debt on the family home. 

This is where the total amount of the mortgage is able to be insured regardless of the working status of the adults in the family.

How do you protect business owners and partnerships from joint and several debt?

This speciality life insurance is also available to business partnerships.

• A 4 partner Accounting firm may have a 4 million dollar debt and need each partner to completely insure the entire debt, not just ¼ of it.
• A joint and several life insurance policy allows each of the 4 partner businesse to completely insure the entire 4 million debt, not just the traditionally ¼ of the debt.

Borrowing with others can increase your opportunity to get ahead but can also increase your risks to manage.

Make sure everyone knows what's at stake when you borrow with others.

Drew Browne is a specialty Financial Risk Advisor working with Small Business Owners & their Families, Dual Income Professional Couples, and diverse families. He's an award-winning writer, speaker, financial adviser and business strategy mentor. His business Sapience Financial Group is committed to using business solutions for good in the community. In 2015 he was certified as a B Corp., and in 2017 was recognised in the inaugural Australian National Businesses of Tomorrow Awards. Today he advises Small Business Owners and their families, on how to protect themselves, from their businesses.  He writes for successful Small Business Owners and Industry publications. You can read his Modern Small Business Leadership Blog here. You can connect with him on LinkedIn.  Any information provided is general advice only and we have not considered your personal circumstances. Before making any decision on the basis of this advice you should consider if the advice is appropriate for you based on your particular circumstance.