If you’re considering purchasing property with a partner, family member, or friend, you may come across the term tenants in common. This legal structure allows multiple people to own a property, but many people wonder: can tenants in common have separate mortgages?
In this blog, we’ll provide a legal overview of tenants in common and discuss whether it’s possible for each co-owner to have their own mortgage. We’ll explore how separate mortgages work, the benefits and risks involved, and the potential complications of owning property as tenants in common with separate financing.
What Does “Tenants in Common” Mean?
In legal terms, tenants in common refers to a type of property ownership where two or more individuals own a property together, but each co-owner has a distinct share in the property. Unlike joint tenants, where each owner has equal rights to the entire property, tenants in common can own different percentages of the property. These shares may be equal or unequal, depending on the agreement between the parties.
Key Features of Tenants in Common:
- Separate Shares: Each tenant in common owns a specific percentage of the property. This can be any proportion, such as 50%, 30%, 20%, or another combination.
- Transferable Interest: Each owner can sell, transfer, or bequeath their share of the property without the consent of the other co-owners.
- No Right of Survivorship: Unlike joint tenancy, tenants in common do not have the right of survivorship, meaning that if one co-owner passes away, their share of the property passes to their heirs, not the remaining owners.
Now, let’s dive into whether tenants in common can have separate mortgages on the property they co-own.
Can Tenants in Common Have Separate Mortgages?
The simple answer is yes, tenants in common can have separate mortgages on the property they co-own, but it depends on a few factors. Here’s how it works:
1. Individual Liability for Mortgage Payments
When tenants in common take out separate mortgages, each co-owner is individually responsible for their portion of the mortgage. This means that if one co-owner defaults on their mortgage payments, the other co-owners are not responsible for that debt. However, the lender can still take action against the defaulting owner’s share of the property.
2. Types of Mortgages for Tenants in Common
There are a few different ways tenants in common can structure their mortgages:
- Separate Mortgages on Individual Shares: Each tenant can take out a mortgage on their respective share of the property. For example, if two people own a 60% and 40% share of the property, each person could potentially take out a mortgage on their individual share. The lender will only have a claim over the borrower’s portion of the property.
- Joint Mortgage with Proportional Shares: Alternatively, tenants in common can choose to take out a single joint mortgage, but still have their shares in the property defined. This would mean that the lender has a claim over the entire property but the loan is divided based on each co-owner’s share of the property. For instance, if one person owns 60% and the other 40%, the mortgage could be divided proportionally.
3. Lender Requirements and Challenges
While tenants in common can have separate mortgages, this arrangement is not always straightforward. There are a few challenges and considerations to keep in mind:
- Lender’s Consent: Lenders may be hesitant to offer separate mortgages for tenants in common because it complicates the process. The lender will typically want to ensure that all parties are jointly liable for the entire loan, and may prefer a joint mortgage arrangement. Therefore, both parties may need to seek approval from their respective lenders before pursuing separate mortgages.
- Mortgage Subordination: In some cases, one lender may require that their mortgage takes priority over the other’s. This is known as mortgage subordination, and it can create complications if the property needs to be sold to repay the loans.
- Property Valuation and Loan Amounts: The value of the property and the loan amounts may also be factors that lenders consider. If one co-owner has a larger share of the property, they may be able to secure a larger loan, but the bank may be concerned about the implications of unequal shares in the event of a sale or default.
4. Legal and Financial Implications of Separate Mortgages
Having separate mortgages as tenants in common comes with both legal and financial considerations:
- Impact on Property Sale: If one co-owner decides to sell their share, it could impact the other co-owner’s ability to pay off their mortgage. For example, if the property is sold, the proceeds from the sale will be divided according to the ownership shares, but the mortgage debt must also be cleared. If one co-owner’s share is not enough to cover the debt, the other co-owner may need to step in to cover the shortfall.
- Difficulty in Refinancing: Refinancing the property could become more complicated with separate mortgages. If one co-owner wants to refinance their mortgage, the lender will need to assess the remaining co-owner’s ability to pay off the existing debt, which could lead to a more complex approval process.
- Inheritance Issues: If a tenant in common passes away, their share of the property and any associated mortgage debt will pass to their heirs. This could create complications if the deceased person’s share was tied to a separate mortgage, as the remaining co-owner may need to deal with the inheritance process and any outstanding mortgage debt.
Who Should Consider Separate Mortgages as Tenants in Common?
While separate mortgages are possible for tenants in common, they may not be suitable for everyone. Here are a few situations where having separate mortgages might make sense:
1. Family or Friends with Unequal Financial Contributions
If tenants in common have unequal financial contributions or creditworthiness, they might choose to have separate mortgages. This allows each person to borrow based on their individual financial circumstances and ensures that each person is responsible for their share of the mortgage.
2. Investors Who Want to Retain Control
If investors want to retain control over their portion of the property and not be liable for the other person’s debt, separate mortgages can be a good option. This arrangement can work well when one person has a larger financial interest in the property but does not want to be responsible for the other person’s mortgage payments.
3. Those Looking for More Flexibility
Separate mortgages can provide more flexibility, especially if tenants in common want to refinance, adjust their mortgage terms, or change lenders at different times.
Conclusion
Can tenants in common have separate mortgages? Yes, tenants in common can have separate mortgages, but this arrangement comes with specific challenges and considerations. While it’s possible for each co-owner to secure their own mortgage, the process can be complicated, and lenders may require additional documentation and approval. It’s essential to understand the implications, both legal and financial, before choosing this option.
If you’re considering buying property as tenants in common and want separate mortgages, it’s important to consult with a financial advisor or legal professional to ensure that the arrangement is viable and in your best interest. A legal expert can help you navigate the complexities of property ownership and mortgage arrangements, ensuring a smoother process for all parties involved.
At Sydney Finance, we can assist with understanding the legal and financial aspects of tenants in common, including how to secure separate mortgages. If you’re planning to purchase property with others and need guidance on mortgage options, contact us today for expert advice.
FAQs
- Can tenants in common have separate mortgages?
Yes, tenants in common can have separate mortgages, but this can be complex and may require approval from both lenders. - What are the benefits of separate mortgages for tenants in common?
Separate mortgages allow co-owners to manage their finances independently, especially if they have unequal financial contributions or credit scores. - What are the challenges of having separate mortgages as tenants in common?
Challenges include lender approval, mortgage subordination, and potential difficulties in property sale or refinancing. - Can one co-owner sell their share if there are separate mortgages?
Yes, one co-owner can sell their share, but the proceeds will need to cover the mortgage debt, which could complicate the sale process. - Who should consider separate mortgages as tenants in common?
Separate mortgages may suit those with unequal financial contributions, investors who want to retain control, or individuals seeking more flexibility in their mortgage arrangements.