Tips for buying property with family or friends
Are you despairing of ever buying your first property? Co-ownership could be the answer if you're trying to get your foot on the property ladder.
Spurred on by the return of multi-generational living and the rise of the granny flat, co-buying between parents and children in particular gives young people the chance to buy sooner, in the area they want to live in… and even in a bigger home than they could afford on their own.
Did you know? The number of homes where two or more generations share the same roof has increased by 56 per cent since 2004
What is co-ownership?
Co-ownership simply means sharing ownership of a property. The most common way to buy a property with two or more people who are co-habiting is through a tenants-in-common arrangement. In this case, the shares of the property don't have to be equal and, should you die, your share is left to a person of your choice.
Most real estate agents are familiar with the process and will ensure that the signature of all parties is obtained after the property has been purchased. They will also note the proportionate stake that each party owns in the property on the sale contract. It's also important to document this in your co-ownership agreement (more about that later).
Combining your borrowing power has a number of advantages:
- combined savings means you'll have a deposit ready faster, meaning you can buy sooner
- greater buying power gives you more choice of location, size and style
- securing a deposit of more than 20 per cent of the purchase price means you'll avoid paying Lenders' Mortgage Insurance
- sharing the expenses that come with buying a home, such as legal fees, stamp duty and inspection reports, makes ownership more affordable
- the ongoing costs of home ownership, such as rates, repairs and insurance, are less for each party.
Put it in writing
No matter how close you are to the people you're co-buying with, situations can change. Disputes may arise over how to split income and costs, refinancing options, defaulting on mortgage payments or the opportunity to sell up and move on entirely. With this in mind, a co-ownership agreement will help you to avoid costly legal procedures should things turn sour.
The agreement, which should be drawn up by a solicitor, will help to establish some co-ownership guidelines as well as recording each party's stake in the property.
These could include:
- ground rules for privacy, sharing resources and how maintenance costs will be handled
- how mortgage repayments will be made - lenders consider each borrower separately, and sometimes you can even split the loan and make separate repayments
- your exit plan - what are the rights and responsibilities of each owner should one person want to sell?
- is moving out and renting out the property an option if relationships within the co-ownership go downhill?
Borrowers who enter into a co-ownership agreement need to be aware of the impact it can have on any additional loans they wish to secure.
For example, if a brother and sister collectively applied for a loan of $400,000 to buy a house with joint ownership over that house, in their eyes they each have a $200,000 loan. However, banks and lenders will record the individual liability as $400,000 to manage their risk, as each borrower is effectively joint and severally liable for the other's loan. If one member of the party defaults on a payment, the other will be responsible for making up the difference given that the bank sees this loan as a single mortgage.
This can present a real stumbling block if one party decides to invest in another property, as the bank will assess them for the full amount of their existing joint loan.
Also, while each party's liability is limited to the value of the underlying security (that is, the property), penalty interest payments can still apply and the lender could force a sale of the property if repayments aren't made.
The best way to protect yourself is to clearly outline the responsibilities of each party on your co-ownership agreement, taking all potential future scenarios into account.
When handled correctly, co-ownerships can be a win-win situation. The key to success is to seek legal & financial advice and put all your requirements in writing from day one.
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To find out more about your home loan options, call us on 13 62 27 to speak to a specialist.