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Many borrowers unaware of joint credit risks

Many borrowers unaware of joint credit risks

Category: Mortgages

Updated: 05/06/2017
First Published: 18/09/2013

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

New research suggests that many borrowers don't understand the risks involved with joint credit agreements when one partner fails to pay up.

Almost one in five (18%) respondents to a Debt Advisory Centre survey said they didn't realise that they could be liable to repay the full amount if their partner can't pay a joint debt.

Worryingly, one in ten (11%) believed each partner is liable for exactly half the amount borrowed, while 2% thought each borrower owes an amount in proportion to their income.

In reality, however, borrowers are usually "joint and severally" liable for shared borrowing, meaning that if a financial emergency was to occur (such as redundancy, death or a relationship breakdown), one partner could be left responsible for the whole debt, regardless of whether or not they can afford it.

Joint mortgage borrowing: the facts

1. Make sure you and your partner are able to make the repayments in the event of splitting up, divorcing or separating.

If one partner moves out of the jointly-owned home, the mortgage lender is legally entitled to insist that the remaining party covers both parts of the mortgage.

Even if your name is not on the mortgage and you wish to continue living in the marital home, you are responsible for meeting regular mortgage payments.

2. Inform your mortgage lender immediately if you are divorced, separated or recently widowed.

It is crucial to speak to your mortgage lender as soon as possible should your circumstances take a turn for the worst.

Most lenders will be sympathetic and offer a payment holiday. In an ideal world, it is easiest to sell the property and split the proceeds.

However, in many cases, one person wishes to remain in the marital home, in which case they may need to borrow the equity to buy their partner out and then demonstrate to the lender their ability to afford the repayments on their own. The good news is that often your existing mortgage can stay in place so you do not have to refinance.

3. Your partner's credit score may have a detrimental impact on your ability to get a mortgage approval.

When applying for a joint mortgage, a lender will consider the combined assets and liabilities of both parties, including individual credit ratings, before making a decision as to whether or not to approve your loan.

In some cases, one partner may have a worse credit score than the other which could prevent you from getting an approval on your loan. Usually, the lender or broker will recommend that you try to get the loan based only on the credit and income of the individual with the best score. If you choose to do this, you can still have both names listed on the title, which will mean you are still joint homeowners.

4. If you wish to add a partner to an existing mortgage, it is a good idea to set up a "tenants in common" agreement.

This agreement ensures that each party gets back what they invest or put in to the property in fair proportions in the event of a separation.

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