The Intricate Dynamics of a Joint Bond
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The Intricate Dynamics of a Joint Bond
By Prof Ndlovu & Matseleng Mogodi
This article was originally published by Real Estate Investor Magazine
One of the most important aspects that Banks/Funding institutions look at when they arbitrate on a Home-loan application is an affordability Assessment. This is done by calculating an applicant's Surplus Income. Surplus income is the residual amount that is left after all expenses are deducted from an applicant's Gross Monthly Income. Empirical evidence shows that this is one of the most common impediments that rob home-loan applicants of the opportunity to own a property of their own.
What Is a Joint Bond?
A Joint Bond can in fact be one of the strategic tactics for mitigating this challenge of affordability. A Joint Bond is a process wherein two (or more) people apply jointly for a home loan.
The benefits of A Joint Bond?
When two people combine their salaries in applying for a home loan the surplus income that the bank would look at in determining the applicant's affordability will of course be higher, thereby improving the chances of their application being approved further reasons are provided below:
- A higher surplus income will of course reduce the element of risk and this, by and large, with all things being equal, would motivate the bank to charge the applicants a relatively lower interest rate (lower interest rate meaning lower monthly repayments and lower capital debt)
- This kind of collaboration would also enable the applicants not only to share the risks inherent in this process but would also reduce their monthly repayments on aspects such as monthly home-loan repayments and insurance-premiums
- Excess income, if/when used responsibly can improve the applicants' chances to save money and improve the value of the property quicker by investing in the necessary renovations
- The other added advantage is that the two applicants can choose/decide who's banking account would be offered to the bank for the monthly debit order/deductions
Possible Pitfalls of a Joint Bond
- If one of the applicants loses the ability to earn an income due to some reason or another it may put a financial strain on the one applicant resulting in an inability to keep up with the necessary monthly repayments
- The premature death of one applicant, especially in cases where the applicants fail to buy themselves life insurance, which is unfortunately no longer mandatory for some of the funding institutions
- Research shows that one of the worst eventualities occurs when there's a caustic relationship breakdown between the two applicants, particularly when one applicant becomes vindictive by informing the bank that he/she is withdrawing from the joint agreement/contract.
- In the case of clause C.3 above the funding, the institution would render the existing joint bond agreement null and void. The remaining party would have to re-apply for a new home loan, in doing so he/she will be subject to the mandatory affordability assessment he/she will also be liable to new legal costs such as transfer fees and bond registration costs. In a case where the remaining party has a compromised credit profile the bank may also demand a substantial cash deposit
Mitigating Factors
In order to minimize the possible dire implications of such eventualities, the following are some of the suggested steps going forward:
- Always keep a clean credit record by, among other things, paying your accounts by or even before the 'due date';
- Whenever possible try and buy cash and keep your debts to an absolute minimum ;
- When there's a possibility of foreclosure be decisive and avoid waiting until there's a crisis ;
- Always avoid attaching emotions to property, so if necessary build a decent shack in your backyard and rent out your main property ;
- When the relationship between you and your partner or joint applicant is in trouble do not delay the intervention of a Third Party mediator or even an arbitrator ;
- Budget, budget, budget religiously ;
- Above everything always remember to make it your habit to manage everything that God blesses you with whether it is material assets or human relationships because anything that you do not manage is bound to be los
- What are some of the other dynamics involved when one is cohabiting for example?
- Cohabitation is very common, despite cultural norms and other societal beliefs. The fact of the matter is that unless one finds strategic ways to save money, it could be quite daunting for most homeowners. So when a couple is cohabiting, it's imperative that they agree upfront whilst things are rosy and sweet, to lay down how they would manage their finances and who should pay for what. Do you know that sometimes one party could agree that they would pay for the bond, and tell the other party to cover utilities and groceries and other insignificant expenses, then turn around and say they've been paying for the bond and try to make it difficult for the other party? Fortunately, the law protects both owners and they may both benefit from the sale should they decide to no longer cohabit. It's important that the couple knows that they have joint ownership regardless of who was paying for what, whether tangible or not
- The importance of a real estate agent in adequately guiding a client in issues of this nature
- Unfortunately, the agent can only offer guidance and experience from what they know or have seen in the property industry. Explaining home ownership and other related costs, and making them aware of the pros and cons of joint ownership is the main thing they can do for people buying jointly. An estate agent cannot push someone to buy with another, they can advise especially if affordability is one of the reasons for the joint bond. What I would say to people getting into a joint bond, is that, if one of you can afford, rather do it that way, and have an agreement of sort regarding the ownership, it helps with a lot of unnecessary stress, but it also allows the couple to use the other person's salary to perhaps buy their next property for investment, or gifting their in-laws
- Advice and insights and what to look out for to those looking to enter into a joint bond
- It is key to be sure that you really want to be with this person for the long haul, think with the head, and not the heart. It's easier to plan for the future when both parties are happy, and you can plan about what would happen should one of the two lose their job, get ill, or even die, it will be helpful for the couple to do this upfront and pack it away because it was done in good faith when things were good. It could also help to be realistic and say 'hey bro, what if one of us wants to exit the relationship, would you want to keep the property?
- Advice to those who are either experiencing separation or divorce and are in a joint bond?
- It's critical that you put your anger and frustration aside because if you don't, you stand to lose more, especially if you have children. We, as property practitioners, do want to sell your property, but when there's pain and blood, it's never a good experience, and we see how it could have actually been a win-win. Therefore, no matter how angry or disgusted you are towards your partner, remember that "Anger is an acid that can do more harm to the vessel in which it is stored than to anything on which is poured" Mark Twain
- What Are Some of The Added Implications In A Joint Bond?
- Joint bonds are great, but they may have implications for the parties involved. For instance, sometimes siblings can decide to buy together, and for good reason to help the family, but at a later time, one of them could decide to get married, usually in the community of property, and this could then mean that the new spouse also owns part of this 'family' house, and creates challenges in the long run. It happens also when a couple, having bought together, decides to split, and that means one of them has to buy the other one out, but the challenge is that the reason they bought together in the first place was affordability, so they might have to sell. But as we know, when most couples split, there's a lot of animosity and vengeance, which could lead to both parties losing out
- I've had an experience where two best friends decided to buy together so that they could afford a townhouse closer to their workplace. This worked out for them in the beginning, but their ranks within the company changed, and one started to earn more, and the other had an expectation that the friend should contribute more, so the original, good idea was messed up by such a great thing to happen, but which also damaged the long friendship.
Author: Prof & Matseleng Mogodi