Joint mortgages can be beneficial in terms of qualifying for a larger loan, but there are also some disadvantages to this arrangement. Here we shall discuss why people agree to joint mortgages, and also look at some of the reasons why they might not be such a good idea.
Benefits of Joint Mortgages
Larger Mortgages: There are three major advantages of a joint mortgage. The first is that the combined income of each party is taken into consideration when assessing the total sum to be loaned. Partners intending to live together will be able to share the expense of home ownership while also qualifying for a larger mortgage, and hence a larger home.
Affordable Mortgages: A parent can help a child obtain a mortgage by agreeing to enter into such an arrangement. By having their income taken into account in the mortgage decision, parents can help their children to purchase their first home, and gradually hand over ownership as they earn more and become able to make the monthly repayments themselves.
Tax Benefits: Each individual involved in a joint mortgage can claim tax relief on their own payments. Another tax benefit is property transfer tax. This is generally capped at a low amount for the first $500,000 then increases above that figure. With more than one mortgagee this amount would be shared, particularly any tax over the lower level, thus potentially saving a great deal of money.
Disadvantages of a Joint Mortgage
Joint mortgages are not always advantageous. The credit record of each person is taken into account in awarding the mortgage. If one person has a low FICO score, then the mortgage will be based upon that score. It is sometimes better for a married couple to have the mortgage in one name, unless both have credit scores of 700 or over. Among other disadvantages are:
Joint Liability: Each party is jointly liable for the loan. If they are paying individually rather than as a couple, then the other mortgagee(s) will have to stand in and make an extra payment should one person default. Should the partnership break up, it is not usually a simple, matter of rearranging the mortgage unless the remaining partners would qualify for the balance of the mortgage loan themselves.
Effect on Credit Score: Should one partner stop paying and the mortgage default because of this, the credit score of everybody involved will be equally affected.
Collateral Issues: If one member of the partnership uses the mortgage as collateral for other finance and defaults on it, the property can be seized and sold to clear the second finance. It is unusual for this to occur, but it is possible and it does happen. Joint mortgages should be arranged so that the property cannot be used to finance another loan.
Are Joint Mortgages Worthwhile?
While they are fine if entered into with a spouse or partner you know well, you should be wary of entering into a joint mortgage agreement with people you do not know well. Joint mortgages can help young couples purchase real estate they could not buy without a joint mortgage. Some couples look upon joint home purchase as a sign of their commitment to each other.
In some cases joint mortgages are a useful way for a group of people to finance the purchase of larger items of real estate such as hotels, which can be used as an investment. However, it is very important that the terms of the mortgage contract are clearly stated. They generally work well, but there is always that risk due to the loan still having to be paid if the partnership breaks up.