Purchasing property is increasingly becoming the domain of the elite, it seems. But some Australians are coming up with novel ways to get a foot in the home ownership door or add an investment property to their portfolio. And one of the newest is what’s known as a split loan.
The word ‘split’ can have nasty connotations. It’s rarely used in a positive way when it comes to romantic relationships, for example. “Since I split up with my wife …”
On the other hand, it can paint a picture of a united front. “How about we splurge on an expensive dinner and split the costs?” It is in this latter sense that there has been a surge on the property front. Various combinations of families and friends are ‘pooling’ their repayment abilities to buy property through split loans.
It sounds like a wonderful solution for those who believed a home was out of their reach. But is it really? What are the risks of a split loan? And what happens if it all goes pear-shaped?
Who should you speak to about a split loan?
If the split loan concept has piqued your interest but you know little of its workings, you probably have questions. And that’s a good thing. Better to understand the potential pitfalls before barging through the front door of the split loan house you’ve bought.
But before even asking those questions, it’s important to ensure that the person answering them has the right answers. Split loans are on the rise but still not common. Some mortgage brokers may not be across their associated nuances. Others have gained a solid experience in split loan management.
Falling into the latter category is Julian Finch, founder of Finch Financial Services. Mr Finch says lenders have identified a market niche for those prepared to join forces to service a loan. “Thanks to some clever thinking on the part of financial institutions, they have developed a suite of products to help people get into the property market,” Mr Finch said.
These products allow sharing the cost of the property through splitting the loan liabilities and repayments across all the owners.
‘Sounds perfect! Where do I sign?‘
As much as Mr Finch would love to have your business, he says there are a number of factors to consider. “Investing in a property with other people while keeping your finances separate, this is a great option,” Mr Finch said.
“But there are some serious considerations and risks that are involved. As a broker [who] knows a lot about split loans and helps a lot of people, [I believe] there are some important things people need to know.”
These ‘need to know’ considerations include:
- Eligibility: As with single-party loans, split loan borrowers will be required to meet eligibility requirements. This entails some criteria specific to split loans. For example, all borrowers must be owners of the property. “Third party guarantors are not allowed,” Mr Finch said.
- Legals: As with any loan, there’s plenty of ‘fine print’ involved. Splitting a loan will probably add to its complexity so Mr Finch advises getting independent legal advice.
- Risks: “When you enter into a split loan, you are effectively providing a guarantee,” said Mr Finch. This means you’ll agree to repaying “the other borrower’s home loan should they be unable to meet their repayment requirements. This is a big drawback to consider,” said Mr Finch.
‘Okay, so now I’m hesitant about signing up for a split loan …‘
Despite the cautions, Mr Finch says there are considerable potential benefits to split loans. “The main benefit of a split home loan is the flexibility to structure your loan to suit your financial needs,” he said.
“You may split the loan with the other party in whichever you choose to.” Not only that, “you can also choose how you want to manage your own portion of the loan,” he explained.
“Each borrower has the flexibility to structure their part of the loan to suit their own needs,” Mr Finch said. Each can decide on the type of loan, amount to borrow, repayment structure and the duration of the loan.
Such flexibility will potentially make getting into the property market, not just for first homeowners, but aspiring property investors.
Did you know about split loans? Would you consider applying for one? Let us know via the comments section below.
Also read: Property tipped to hit new high. Here’s how much prices have risen in each capital city
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