Know the credit file risks before co-financing
Know the credit file risks before co-financing with a sibling
1 February 2013
Real estate agents have recently reported an increase in siblings co-financing on homes in order to break into the property market, but this has a consumer advocate for accurate credit reporting concerned that some siblings could be getting financially involved without understanding the full implications for their future.
CEO of MyCRA Credit Rating Repair, Graham Doessel says real risks can arise when anyone co-finances, for both their relationship and their credit rating.
“I understand it is hard for young people to get a toe in the property market, but it is so important for them to understand, when you co-finance, you must trust your personal credit rating to your sibling for the life of the agreement,” Mr Doessel says.
Real estate agents say brothers and sisters purchasing together now make up 10 per cent of traffic at open houses and inspections.
The trend, which has grown in the last three months, allows buyers to afford mortgages that would otherwise be beyond their reach on a single-income.
"It is how they're affording to break into the property market," agent Silvia Vitale of Laing + Simmons Potts Point told the Sunday Telegraph this week.[i]
But Gold Coast mortgage broker, Heather Nyssen, recently discouraged the trend, saying that siblings are usually quite young when they enter the financial partnership, and due to changes in circumstances can end up restricted by the obligation in later years.
“In some cases they buy it so one or other can live in it, or they buy as an investment property, but they often end up in a bad position,” she told Australian Broker on Thursday.[ii]
Mr Doessel agrees “Not only can the obligation restrict financial decisions in the future, but there is the potential for something to go wrong which sees both credit files defaulted if one sibling makes a mistake.”
He says if repayments on any accounts linked to the property are not made on time, both parties could be held responsible and defaulted or a late payment notation listed on both credit files accordingly.
“Rates, energy and of course finance repayments need to be paid on time every time to avoid a late payment notation on your credit file, and paid within 60 days to avoid a default listing,” he says.
Defaults remain on a person’s credit file for five years, and late payment notations for two years.
“If you have a default listing it can be difficult to get additional finance, a credit card, or even a mobile phone plan. If you have too many late payment notations against your name, it may also weigh negatively on your ability to obtain credit,” Mr Doessel says.
He recommends those siblings wanting to co-finance on a property take these things into consideration:
1. Know about your sibling’s credit history. If your sibling has financial skeletons in the closet, you should be wary about leaving your credit rating at risk. It would be a good idea to order a copy of your credit rating (your credit report) to make sure each of you is fully aware of the other’s financial history.
For assistance to obtain your credit report at no cost, contact MyCRA http://www.mycra.com.au/credit-file-request/
2. Ask what debts they currently have. This will give you an indication of how your brother or sister feel about money, and how much debt they consider normal to handle.
3. Talk about paying bills. Do they always pay them on time? If not, why not? This will give you a good indication of how important they view credit repayments.
4. Ask what their financial goals are for the future. Do they match yours? If you intend to hold on to the property whilst your sibling wants to sell in a few years to repurchase, are you prepared to pay them out? Will anyone be living in the property? How will you divide expenses on the property?
5. Get all agreements in writing. Consider getting a solicitor involved to draft up a formal agreement. You may be family, but in 5 or 10 years your responsibilities and needs may have changed and you need to know what your legal rights and obligations are.
6. Leave emotion out of it. As much as you may love your sibling – arguments can occur – particularly when money is involved. If the financial relationship is ‘strictly business’, it may be easier to separate the property from all other credit the individuals may possess. This is especially true if the property is purely an investment and neither sibling is living in the property.