Popular loan structure for couples prompts warnings from lawyers

By Stephanie Aikins

January 16 2019
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Investors have been warned against adopting a popular loan structure that may leave them vulnerable in the event of a relationship breakdown.

Speaking with Nest Egg recently, Jennifer Hetherington, accredited family law specialist at Hetherington Family Law, said she was concerned that the current tough credit environment may inspire prospective property investors to seek out cross-collateralised loans, a move she said could be financially devastating should they suffer a future relationship breakdown.

“Banks are requiring larger deposits for investment properties. So, if people are looking at an investment property and thinking, ‘Well, we don’t have enough deposit, so we’ll put the family home up,’ it is worrisome,” she said.

“One of the things I talk to people about if my clients are investing is to try to keep the family home separate and secure if you can, without having cross-collateralisation, because if the marriage or the relationship ends and there’s cross-collateralisation, then the bank can put their hand out for more money, and you can end up with the situation of losing both properties.”

This is a reality Ms Hetherington is all too familiar with, as she revealed she witnessed many separated couples face the loss of their investment property and their primary residence due to cross-collateralisation arrangements during the GFC.

She said that with current investment market volatility and falling housing markets placing similar financial stress on relationships as occurred throughout the financial crisis, property investors would be wise to safeguard against the worst.

“I know a lot of family lawyers who have had enquiries due to financial pressure. Finances do put a stress on a relationship,” she said.

Ms Hetherington said investors who adopt cross-collateralised loans may face difficulties should a future relationship breakdown occur, as dropping house prices will likely mean they are unable to sell the investment property for enough to cover the mortgage.

“So, you’re facing a situation then of having to potentially sell both properties to be able to disentangle the financial relationship of the parties, which was a horrible situation,” she explained.

“We can’t obviously do anything about the future of the housing market, but there are some things people can do between themselves to minimise the likelihood of one of the parties forcing a sale, for example.”

Best practice

Ms Hetherington recommended that prospective investors consider entering into a binding financial agreement to establish what will happen to the investment property and the main residence should the relationship end.

She said this gives investors security in their investment and autonomy to decide the future of the property.

Arrangements can vary to meet the couples’ desired outcomes, from implementing a clause that would see one party receive the main residence and the other the investment property, which would then transfer to be their primary residence, to outlining that the property cannot be sold by the parties until the market value is priced to cover the mortgage and the cost of sale.

“If they have a binding financial agreement, then they have the opportunity to set out in advance what will happen if the worst happens,” she explained.

“It’s a bit of an insurance policy, really, and if people are investing and looking to build their future, it’s something they should consider having as part of their asset protection strategy moving forward.

“You can be signed on even if you’re happily married.”

Getting help

Ms Hetherington recommended prospective investors seek professional financial advice to discuss the structures through which the property will be purchased, such as family trust or super fund, and determine each party’s stake in the investment.

“It’s really important for parties to sit down and think carefully about, ‘How do we purchase this?’ Do it before they sign a contract, because once you sign a contract, you can’t change the name without incurring stamp duty charges.”

“These are things we can do that offer some protection, but it’s got to be done really before the property is purchased, otherwise, it can become a lot more expensive or even not possible to do correctly,” she concluded.

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