As property prices increase, pooling deposit funds together with a friend or family member to is a great option to enable you to get into the market sooner. It also allows you to share the load of mortgage repayments and expenses with someone else potentially making it more affordable. However, it also comes with some risks. Let’s have a closer look at some of the pro’s and con’s as well as our “must do” list if you are considering this structure.
Higher Borrowing Power
By combining two or more incomes together the banks will be willing to lend you more. This means you are able to consider more expensive properties (if you wanted to) that perhaps you may not have been able to afford on your own.
Get into The Market Sooner
By pooling deposit funds together, you can get into the market sooner than if you had to save an entire deposit on your own. You, therefore, get the benefit of capital growth sooner and avoid paying more for the property if you had to wait another year or two to save the entire deposit on your own.
Shared Monthly Expenses
Home ownership comes with not only a mortgage but other expenses such as council rates, water rates and body corporate fees for apartments. On top of all the general utilities like gas and electricity. Buying with someone else enables you to share these expenses making the out of pocket cost much more affordable than if you were to buy on your own.
Ability to Split Loan
The banks offer split loans nowadays, which means each buyer effectively can have their own designated loan account that they can pay down. So, one party might want to make the minimum required repayment and one might want to pay extra. Both parties are responsible for the entire debt but having a split loan just makes it a little more autonomous.
Difficulty Moving or Selling Quickly
There is bound to be a time when one party wants to move out or sell the property. As each party needs to agree, the process will always take much longer than if you owned the property on your own.
Potential Credit Score Damage
It is important to remember that if you buy with a friend or family member you effectively go on the application as joint borrowers. This means that each party is responsible for the entire debt. So, if your friend decides to skip town and stop paying the mortgage, or they have an accident and lose their job and don’t have adequate insurance, you are responsible for making the entire mortgage repayment on your own. If you can’t, the bank may foreclose on the property to recover the debt.
Borrowing Power for Other Loans Reduced
When banks assess your capacity to borrow money, they take into account existing debt commitments and mortgage repayments that you have. Not just your half, the entire loan. So, if you and your friend borrowed $500,000 to purchase a property, then 2 years down the track you wanted to borrow money to purchase another property this time on your own, the bank would use the entire commitment of $500,000 you have with your friend in their calculations (not just your half of $250,000). This means your capacity to borrow is reduced.
Breakdown of Relationship or General Disagreements
Relationships break down. Lives change. Even with family and friends. It is likely that at some point there will be disagreements. Read our must do section below which will outline critical things you need to put in place to prevent minor disagreements becoming a major issue.
Sign a Thorough Legal Agreement Before Buying
This is critical. Any solicitor can draw up an agreement between both parties which should outline how expenses are to be paid, how the price will be determined if you were to sell, the contribution of each party to the deposit, the agreed minimum time to hold the property before selling, how disputes will be resolved. It should cover off every conceivable issue you can think of and if it does your chances of success via this structure are high.
Specify Tenants-in-Common on Title
Your title ownership must be tenants-in-common. This means that each party can stipulate who they want to leave their share of the property too in the event they pass away. If the ownership is stipulated as joint proprietors, if one owner passes away, their share of the property is automatically left to the other owner.
Try to Partner Up with Someone at a Similar Stage of Life
This is common sense. Try to buy with someone of a similar age and income level. This is not critical, but it is more likely you will want to live in a similar location, have similar goals and similar disposable income. It is more difficult for a 30-year-old to purchase with a 47-year-old, as it is more likely that both parties will have very different priorities in the short and medium term.
Two Parties are Ideal
There is no limit to the number of parties who can purchase a property together. However, the more people involved, the more the cons above are amplified and the more likely something is to go wrong.
Have Adequate Life and Income Protection Insurance
As each borrower is responsible for the entire debt, it is critical that each person has piece of mind that the other has adequate protection insurance in the event they die or get ill and cannot work for a period of time. The last thing you want is for one party to be left with the responsibility of having to pay the entire loan repayment. I suggest making proof of adequate protection insurance a part of your legal agreement upfront
Hopefully, this blog has given you a better understanding of the benefits and disadvantages of investing with friends or a family member. If you’d like more tailored advice for your specific situation, please contact Inovayt.