Firstly, there are two common types of property ownership in Australia including:
Tenants in common
- If a tenant in common passes away, the share of the property they owned does not automatically go to the other person on the title of the property. The asset will be distributed as per their will (see below)
- Tenants in common also provide a way for new investors to pool their funds and increase their borrowing capacity to buy that first property together and get into the market.
- A joint tenant generally involves defacto’s or married couples who own a property together. Under this structure should one of the partners die, the other partner will automatically claim the rights of the property.
Most of the time, the person listed on a property’s mortgage is the same person listed on the property’s title, or deed. For example, if a couple buys a property with a mortgage, both are typically named on the mortgage and deed. However, under some circumstances someone may want to be on the mortgage but not on the deed.
Since borrowers who are not on the title deed, are not legal owners of the property, they cannot pledge the property as collateral. Therefore, these borrowers, by default, become guarantors. Legally, the difference is significant. Co-borrowers are responsible for making monthly payments as are primary borrowers. Guarantors are only responsible for loan balances after default by primary borrowers.
So lenders will typically want the borrowers to be on title so that you can offer the property as collateral for the loan. This can be dependent on the lenders’ policy so choosing the right lender is important to achieving your strategy.
There are some risks if you and your partner are on the mortgage but you are not on the title including that your partner has the power to sell the house because you aren’t a legal owner (depending on the legal situation). Changing the title later in order to add you can be complicated and expensive too so it is important to get this right from the start.
Why consider this at all?
- Tax benefits: – if you are the higher income earner and listed on the title, you can claim the tax benefits that come with property ownership if it is an investment. This includes all the depreciation benefits such as building, fixtures and fittings, interest on your loan, council rates, agents and body corporate fees. This will improve the household cash flow as the primary income earner can reduce their taxable income for tax purposes leaving more money in their pocket.Land tax is also an important consideration as to whose name you put on the title of the property to ensure you don’t pay unnecessary land tax. It is a state based tax levied on the value of the land on all owners where it is not their principle place of residence. In addition, to avoid land tax you may want to purchase your next property in another state which also gives the added benefit of diversifying your portfolio. In NSW the land tax threshold for 2017 is $549,000. This means your land tax assessment is calculated on the combined value of all the taxable land you own above this threshold.
- Protecting your asset from creditors; – giving your partner title protects your home from creditors if anyone wins a lawsuit against you and wants to claim your assets.
- In the event of death; – generally speaking, creditors come before your beneficiaries. Your deceased estate must pay all your debts before a distribution can be made to beneficiaries and this includes your mortgage. If that means selling your assets to pay the debts, the executor must do so; even if it reduces the assets available for distribution to beneficiaries. There are however some exceptions as some assets can’t be touched by creditors including superannuation, proceeds of life insurance policies or compensations claims in which case you would need to authorise your executor to use life insurance proceeds to pay off a home mortgage.
The Home Loan Company can help structure your finance to achieve your goals and that may include referring you to specialists such as tax, legal and financial advisors if necessary. Talk to us and we can help you with these important considerations.