Question:
Hi, I’m Eric. I’m currently engaged to Lin and we plan to get married in 6 months time. We are looking to buy our residence at Kota Kemuning for RM 700,000. As such, my question is, ‘Should I buy this property as a proprietor or should I make the house purchase with Lin, my wife and thus, be co-owners of the property?’
Answer:
There is no straightforward answer to this question. This really depends on how Eric and Lin plan to work this out together as a couple. As such, communication is key to ensure their interests are aligned and safeguarded. Thus, in this article, I’ll share 5 key factors to consider to decide if couples should jointly buy a piece of property or otherwise. They are as follow:
#1: Do Eric and Lin Intend to be Property Investors?
First, we are required to place a 10% down payment of the price of a residential property, if we do not owe 2 mortgages on residential properties in Malaysia. In Eric’s case, if he has no or one mortgage on residential property today, he could place RM 70,000 (10% of RM 700,000) in down payment to buy the property.
If Eric has two or more mortgages on residential properties, he needs to place a 30% down payment for the property, which works out to be RM 210,000. So,
0 or 1 Mortgage on Residential Property = 10% Down Payment
2 or More Mortgages on Residential Properties = 30% Down Payment
Thus, if Eric and Lin intend to build their property investment portfolio, it would be better for Eric to purchase the property as a sole owner. This is because they can buy up to 4 residential properties by placing 10% down payments for them.
Eric (2 Properties) + Lin (2 Properties) = Couple (4 Properties)
However, if Eric and Lin purchase this property as co-owners and finance it with a joint mortgage, both Eric and Lin are viewed to have 1 mortgage on a piece of residential property each despite it to be of the same property. As a result, they can buy up to 3 residential properties by placing 10% down payments for them.
JV (1 Property) + Eric (1 Property) + Lin (1 Property) = Couple (3 Properties)
As such, if Eric and Lin plan to be serial real estate investors, it is ideal for any of them to buy this property as a sole owner. Otherwise, it would be okay for both of them to buy the property as joint owners.
#2: Who Pays for the Down Payment and the Mortgage of this Property?
Let’s say Eric and Lin are first-time property buyers in Malaysia. Hence, they will not only place a 10% down payment for their house but also will incur 5-10% in property transaction and renovation costs. Thus, the initial cost would probably be around RM 140,000 to purchase this property.
In addition, let’s assume the mortgage details on this property are as follows:
– Mortgage amount = RM 630,000 (90% of RM 700,000)
– Interest Rate = 3% per annum
– Loan Tenure = 35 years
– Mortgage Installment = RM 2,425 a month
Hence, if Eric has RM 140,000 in cash and could service this mortgage in full, he has the option to choose if he wants to buy this residence as a sole owner or as a joint owner with Lin.
If Eric decides to buy this residence himself, Lin shall be freed from being a joint owner of the property. As such, if Eric fails to service the mortgage in the future years to come, Eric’s credit score alone will be affected.
However, if Eric and Lin wish to buy this residence with a joint mortgage, if they fail to service the mortgage, their credit scores will be affected. So, let’s assume that Eric fails to meet his portion of the installments, Lin has to pay the full sum of the installments to avoid being blacklisted in their credit scores.
#3: Future Sale of This Property
If Eric is the sole proprietor of this residence, he could decide on the disposal of his property by himself.
If Eric and Lin are joint-owners of their residence, they need to agree to dispose of the property for it to be transactable in the open market. If Eric wants to sell, but not Lin, then, this property could not be transacted.
Hence, if Eric is dominant and wants to make the decision himself, it is better to purchase this residence as a sole owner. But, if Eric and Lin intend to make their decisions on the property together, they may consider purchasing it together as joint-owners.
#4: If Eric and Lin Passes On Prematurely
If Eric is the sole proprietor of this residence, Eric could write a will to bequeath the entire property to Lin.
However, if Eric and Lin are co-owners of this property, they should agree to get their wills written and leave behind their stake in the residence to each other. If they pass on simultaneously, they can opt to instruct the executor to dispose of their residence and distribute its sale proceeds to their preferred beneficiaries.
#5: Debt Cancellation Strategies
From Point #4, the ownership of a real estate is only transferable if its mortgage is fully settled.
So, here is a scenario:
Let’s say Eric is the sole owner of this residence, He wrote a will to leave behind the property to Lin. Upon his death, the residence is valued at RM 1 million and has RM 400,000 in outstanding mortgage. The mortgage must be settled before the residence could be transferred to Lin. So, the questions are:
– Did Eric buy a MRTA policy to settle his mortgage in full upon his death?
– If not, did he buy an insurance policy to enable Lin to settle his mortgage?
Likewise, a similar debt cancellation strategy must be carefully considered if the couple wishes to purchase their residence as its joint-owners.
Conclusion:
In brief, here are the 5 key factors to consider before deciding if co-ownership is suitable for you and your spouse:
1. Your desire to build a real estate portfolio.
2. Your affordability and willingness to commit to a property for the long-term.
3. The impact on your credit score if your spouse fails to pay the installments.
4. Who decides on the future sale of this property?
5. Estate planning matters.
Here, I believe it is ideal for a couple to have a deep communication on this and have a consensus as to which works best for the both of you.
Otherwise, it may be a wise move to not proceed with the property purchase, if you and your partner fail to come into an agreement about this.
