Tying the financial knot – 4 do’s and don’ts of borrowing as a couple

Many homebuyers are, not surprisingly, happy couples looking to fly the old family nest and establish their own, new residence.

Without a second thought, they go through the motions of acquiring a said house in their blissful state of togetherness; often putting both names to the mortgage contract.

But there are some important considerations when it comes to arranging finance as a couple, particularly if the property you are purchasing happens to be an investment, rather than your own home.

Firstly, your property investment debt and ownership structures will largely determine how viable your portfolio is from a cash flow perspective.

Given that optimising the growth of your investments and holding them within a manageable cash flow environment should be your priority, this is something you want to get right on the money!

And what can be the biggest cash flow curse for property investors, or any working Australian for that matter?

You guessed it – income tax and increasingly for small home-based business owners, GST.

Now there is no “one size fits all” when it comes to structuring investment debt, hence we always recommend you consult a professional mortgage broker who is experienced in property investment.

However, there are some general principles that can be applied consistently to ensure your loans are established correctly.

This list will get you started…

1. Get the ownership structure right

This is important from both an income tax perspective, as well as an asset protection one when we talk property investment.

There are numerous pros and cons with all ownership structures, so careful homework needs to be carried out at this stage and a long-term strategy, based on your investment goals, must be the basis of your purchasing decisions.

You can buy an investment property as a single entity, a couple, in a joint venture arrangement, within various trusts and companies, and as tenants in common.

Seek advice on this from a properly qualified and experienced advisor before you even start looking for the perfect property investment.

2. Seek professional counsel and take it!

Leading on from the above, property investment comes with a steep learning curve.  

It is not, and should never be approached in the same vein as, the purchase of your own home.

It requires sound logic and careful analysis of all the facts and figures.

You can attempt this on your own, or you can engage the services of an appropriate expert, along with others who will become part of your investment advisory team – you’re A-team!

The role of your financial adviser/accountant specifically is to provide guidance as to the best way to acquire and hold your investment properties, according to your current situation, needs, and future plans.

3. Make the highest income earner the beast of burden! 

Okay, that might not have come out quite right!

But the premise is to set up your loan in the name of whoever earns the most money.

The interest paid on your investment debt is tax-deductible, so you want to maximise that deduction wherever possible.

If need be for serviceability, the lesser income earner can be a guarantor to the loan.

4. What’s the worst that can happen?

If every cloud has a silver lining, it also carries the promise of rain.

Any type of property investment ownership and debt structure carries risk, so you need to heed those risks and account for them in your planning.

Consider what might happen if one of you becomes ill and can no longer work, or other factors that are out of your control transpire against you, such as;

• Property market highs and lows
• Long-term tenant vacancies
• Regulatory reviews (particularly unfavorable legislative changes like those recently discussed around negative gearing)
• Another economic and social upheaval

It is always possible to prepare yourself for a rainy day with the right type of debt structure. 

We usually recommend cashflow buffers for clients, particularly those who are highly geared, so they have a backup should one of their “worse case scenarios” play out.

At the end of the day, any type of investment that requires a large debt to make it possible comes with risk.

The key is to mitigate the risk while optimising your returns and establishing those safety net contingency plans to ensure you always stay nicely afloat.

Get the first step right – by setting yourself up for success with careful foresight, planning and honest evaluation of where you are today and where you want to be tomorrow; particularly if you’re taking someone else along for the ride!

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