Let’s be real: It can be difficult to enter the property market. This may lead you to consider the option of purchasing with a friend, brother, sister, or uncle to share the responsibility. In some cases, this can be a great option – it can help you reach a higher price point and get you into the market sooner.
Before diving in, there are some key considerations and plans that you need to consider.
Future Borrowing Capacity
If both parties only look to purchase one property, then this won’t be an issue. However, if either party would like to purchase another property in the future, this is how the banks will consider your borrowing capacity.
If you have a total loan of $500,000, common sense would suggest that person 1 has $250,000 of debt and person 2 has $250,000 of debt.
Yet in the eyes of most banks, this does not ring true. If you would like to purchase a second property in the future, by yourself or with your significant other, you will need to be able to service the full $500,000 debt, but you will only be able to use half of the rental income you receive from the property. This can have a big impact on your borrowing capacity.
In a situation where you have a single person making $80,000 p.a, this extra debt could reduce your borrowing capacity by more than $250,000.
There are a limited number of lenders that will only consider the ownership portion for any future borrowings, so you might be lucky enough to not face this issue. However, it is vital to understand the potential roadblocks and ensure you have thought out your future property goals when looking to purchase with a mate.
Life plans heading in different directions
As life goes on and lives head in different directions, you may find yourself in a situation where one party wants to sell and the other wants to hold on to the property.
This is worth creating a plan for considering the variety of situations you could find yourself in. Certain agreements may need to be vetted by a solicitor. For example;
- After 7 years, if either party decides they want to sell, they have the right to exercise that option.
The reason I have gone with 7 years is that based on past property data, that is enough time to give you some capital growth where selling could still be a profitable outcome for both parties.
- The other party has first option to purchase the other portion of the property at the current market value
This is simply a fair and equitable agreement when you are heading into a partnership with someone.
Overall, I have seen this situation be done very successfully & also seen and heard about stories of this not going so great.
As with all large financial decisions, the important part is to consider what we have discussed;
- Borrowing capacity could be reduced for future purchases.
- Have a frank discussion and have an agreement in place before purchasing with a mate.
Everyone’s situation will be different & if you would like to discuss further please feel free to get in touch for a no obligations chat.