Shared home ownership is common among couples but as property prices continue to soar, some buyers, particularly younger ones, are changing tack and exploring the idea of buying a home with their friends or family members.
If you’re struggling to get into the property market on your own, teaming up with family members or friends could help get you into the real estate market sooner. However, you need to be careful with this arrangement as it’s quite different from buying with a partner.
The benefits of buying with friends or family
Splitting costs
The number one advantage of buying a home with someone else is splitting the cost. Not only do you share the cost of buying a property, you can also share associated costs like building and pest inspections, conveyancing fees, stamp duty, and lenders mortgage insurance (LMI) if it applies. Sharing expenses can ease the cost burden of buying a property considerably.
Getting into the market sooner
With this arrangement, you might be able to save for a deposit faster and enter the market sooner than you would on your own. After all, not everyone has a partner or a spouse to buy a property with. When you consider that it can take up to ten years (or longer) to save a 20% deposit on the median house price in some Australian capital cities, it makes sense to pool your funds with a friend or relative to speed up the process.
Better borrowing power
Buying with another person, or persons, means you’re also combining your borrowing power. This can enable you to borrow more, feasibly getting you a bigger property in a better location than you could buy on your own.
The risks of buying with friends or family
Relationship breakdowns
The ‘two heads are better than one’ adage might not always ring true when it comes to buying a property with a friend or family member. Buying a home is a huge, long-term financial commitment and both parties have to take on shared responsibilities and make joint decisions. Be mindful that these could complicate and strain your relationship with your co-owner/s.
Different long-term goals
Changing lifestyles can cause issues to arise down the track. Particularly, if one person wants to sell and the other doesn’t, perhaps due to one party wanting to purchase a home with a new partner, receiving a job offer in another location, sickness, or other unforeseen circumstances.
One buyer may face financial hardship
Circumstances can change and if one buyer falls into financial hardship, responsibility for meeting loan commitments might fall onto the other party. (This will depend on your loan set up – more on this below.) If the person struggling was to default on their repayments, it could affect all parties, not just the person facing financial difficulty.
Can affect other loan applications
If you wish to apply for another home loan at some time in the future, lenders may consider your existing home loan as your sole responsibility. This means that your borrowing capacity could be severely reduced, or a future home loan application rejected. (This will also depend on the structure of your loan.)
How can you minimise the risks of buying with friends or family?
It is essential to obtain advice from a conveyancer or solicitor before buying a house with a family member or friend. There are several steps you and your co-buyer can take to minimise potential risks.
Establish a legal will
Make sure you get a will drawn up by your solicitor to show who will inherit your assets. If you already have a will, ensure it’s updated to include details surrounding the new property.
Thought should also be given to whether the co-owners give each other a Power of Attorney if one were to become incapacitated.
Draw up a co-ownership agreement
To avoid future disputes, it’s a good idea to establish a co-ownership agreement that covers every conceivable issue. Costly disputes can be avoided if issues are considered up front and solutions are agreed upon before the property is purchased.
The agreement doesn’t have to be complex, but it will require all parties to have rules and agreements worked out in advance – this is crucial. For example, co-owners may agree that if one wishes to sell, the other co-owners have first right of refusal to buy their share.
Some of the things that need to be discussed in your agreement include:
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The establishment of a sinking fund which could be used to cover repairs and for any periods when the property is vacant (if it is an investment property)
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The agreed timeframe to hold the property before selling
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A plan to pay for unforeseen maintenance costs
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How various insurance issues will be handled
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Taxation/depreciation and capital gains tax issues clarified
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How the price will be determined on the sale to another co-owner
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Who determines the rent and the tenant (if it is an investment property)
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Contribution of deposit and cost of the property
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Which of the co-owners will live in the property, if any, and on what basis
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How sale proceeds will be distributed, why a sale would take place, and how to resolve disputes
Decide on the co-ownership structure
In legal terms, there are two co-ownership title structures that set out the rights of each co-owner.
Tenants in common
Each co-owner owns a percentage share of the property, which may or may not be equal. Think of it as similar to owning part of a business. This structure is often used by co-buyers of an investment property.
Under this structure, each co-owner is free to sell or otherwise deal with their interest in the property at any time, provided that there are no terms in the co-ownership agreement stating otherwise.
The interest in the landholding of each co-owner is also separate and distinct from the other.
Joint Tenancy
Under this structure, the co-owners own the property equally. Each has a right shared with the others to the whole property but no individual right to any particular share in it – sort of an ‘all in or nothing’ arrangement.
This means there are limits to what each owner can do with their share of the property, especially in terms of a potential sale.
Joint tenancy is the most common structure of property co-ownership in Australia, typically used by couples purchasing a house together.
The right of survivorship is an essential and necessary characteristic of joint tenancy. On the death of one joint tenant, the surviving joint co-owners will split the shares equally. If there’s only one other co-owner, they’ll inherit the whole share. This is regardless of what may be in the deceased person’s will.
Check on the structure of mortgage
You should ensure that the co-ownership agreement fits in with the structure of the mortgage.
That’s why it’s important you seek financial and legal advice and consider the options available for you and your co-buyers before you go signing up to any loan agreements.
Given that a mortgage is generally secured by the whole property, all co-owners might be at risk of the bank foreclosing on the loan if just one person defaults on their repayments.
It may be a different loan arrangement would better suit your co-share circumstances. This is where a property share loan can come into play, allowing different co-buyers to apply for their part of the loan individually.
Not all lenders offer them, but they are worth seeking out if you are more comfortable maintaining some financial independence from your co-owners. Let’s consider property share loans in more depth.
Can you have separate mortgages on one property?
Generally, when you buy a property with someone else, the home loan you take out will be a ‘joint home loan’. That is, one where finances of the purchasers are intertwined and both income and liabilities are considered joint and equally shared. This is the usual set up with couples or partners who buy a home together.
But this isn’t always the ideal set up for family or friends looking to buy a property together. In such cases, a property share loan might be more appropriate. These recognise individual ownership by allowing two separate home loans to be taken out over the same property with both mortgages secured against it. Under these loan arrangements:
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Applicants are assessed according to their individual borrowing capacity
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All homeowners can pay different deposit amounts, and their loan amounts and repayments will be adjusted accordingly
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Each homeowner can pay back their loan at their own rate (of course, still meeting the minimum required repayments)
A key difference in how property share loans compare to a joint loan structure is that if you’re in the market for a home loan in the future, lenders won’t consider that you owe the whole amount on the mortgage as they would if you were part of a joint property loan.
In effect, it allows co-owners to retain higher borrowing capacity should they wish to take out another loan down the track.
How common are property share loans in Australia?
Several major banks offer property share loans, each with their own lending criteria and ground rules. These include Commonwealth Bank and Westpac.
A mortgage broker may be able to help you find the best property share loan to suit your circumstances and assist with the application process. But they, and your eventual lender, will want to know the details of your proposed ownership structure and that you have sought independent financial and legal advice on how your shared ownership will proceed.
Some lenders may even ask for a signed statutory declaration to confirm you have done this. Others may ask you to guarantee each other’s portion of the loan as security support. (It is highly advisable to seek legal advice before doing this.)
Property share loans are continuing to evolve in the Australian market as property prices continue to rise. For homeowners trying to break into the market or people who can see the benefits of pooling resources, they can offer independence and a degree of flexibility, but there are some important decisions to be made before signing up to one.
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