While it's not exactly clear just how many residential properties are being jointly purchased by friends or relatives, I am seeing more examples of siblings, cousins and friends buying joint property because on their own they have limited borrowing power to do so.
Coupled with the hike in medium house prices, particularly in inner city areas, plus more stringent lending practices, it is easy to see why co-property ownership is on the rise.
Let’s consider a recent example. Both Jim and his older brother Andrew grew up in country Victoria and both ended up in Melbourne to study and then settled in the inner Melbourne suburb of Prahran. Both had good jobs and had managed to save some money for a deposit.
By the age of 27 and 30 respectively Jim and Andrew had saved some money for a deposit and were both in a position to buy a home - but just not in the area where they wanted to live, inner east of Melbourne. With rising house prices, they couldn’t afford to buy a property on their own in the area where they wanted to.
“We could have both bought properties in the outer suburbs, Geelong or Ballarat - but we both wanted to stay in the area we had been renting in these past few years. So buying a property together was a good solution”. Jim said.
“ We obviously knew each other well, had lived together before as children - so we weren't worried about that side of things. It was all the “ what ifs” that we needed to cover off. We knew we needed more than a handshake if the experience was going to be a positive one.”
Put it in writing
It is important to document and clarify expectations before purchasing a property with friends or family. Often referred to as a Co-ownership Agreement, this is a legal agreement which sets out the roles and obligations of two or more people who are planning to purchase a property together.
The Co-ownership Agreement does not need to go to the lengths as outlined in Sheldon Cooper’s Roommate Agreement from the Big Bang Theory, which includes such clauses as “ Overnight guests notification clause” - where there has to be a 24-hour notice if a non-related female is staying over night!
Rather, a Co-ownership Agreement should cover such topics as:
- Home loan structure - joint loan or separate loans.
- Liability/process if the other party defaults on any mortgage repayments.
- If one party wants to sell the house.
- Home loan refinancing and rate review process.
- Buying out the other party.
- Property maintenance and costs.
- Actions if one party wants to borrow against the property to draw down on equity for other purposes.
If after going through this process, they decide their goals and objectives are not aligned, then nothing is lost. It is far better to learn this before they buy the property together than afterwards.
The next step is to finalise the mortgage structure. There are two different loan structures recommended for friends or family buying a property together:-
- Joint loan where the ownership and equity is split down the middle, or
- Split loan where ownership is apportioned on a percentage basis.
In both cases, both parties would be responsible for their own debt and all parties responsible for the total debt (referred to as joint and severally liable).
If, for example, Jim and Andrew collectively apply for a loan of $600,000 for the joint ownership of a property, then you can say that technically they will each have a $300,000 loan. But in order to manage the risk, lenders will view this as a single mortgage and therefore a liability will be held against both Jim and Andrew of $600,000. If Jim defaults on the loan, then Andrew will be held responsible and vice versa.
One issue that is often overlooked is that if one party decides to borrow to buy an investment property for example, they will be assessed on the full amount of the current mortgage - not just their portion.
For Jim and Andrew the benefits far outweighed the negatives. “By combining our borrowing power, we got to stay in the area we loved. We got into the property market much quicker than if we were on our own, which means we are benefiting from the capital growth of our property”, Jim said.
“ Plus, we would have been sharing a rental property with someone if we hadn’t bought, so why not share our own home with a person who has the same vested interest in the house as we do.” Jim said.
The old adage of “go in with eyes wide open’’ rings true when it comes to buying property with friends or family. By documenting and clarifying expectations upfront, in the form of a Co-ownership Agreement, you future-proof all the risky scenarios that may or may not arise.
We all know that life sometimes becomes complicated and unwinding joint property can be emotive and messy. For example if one party incurs other (unsecured) debts, a lender could look to the joint asset to recover those debts, therefore impacting on the other party’s personal situation.
When done right, co-ownership with the right people can be a positive and successful experience.
If you would like to discuss your own property scenario, feel free to contact me to talk through your situation.
Collins Home Loans