The family factor: Should you buy property with a friend or loved one?
Purchasing a property with a friend or loved one can be a great way to enter to the property market, but taking on such a large financial responsibility with someone else does come with risks. These are some of the pros and cons to consider before you both sign your names on the contract.
PRO: Entering the property market earlier – or at all
Rising house prices, the need to save for a deposit and the risk of fluctuating interest rates can all make getting your foot in the homeownership door very difficult. It may seem an impossible task at times, and it can take years before you’re in a serious position to purchase. Buying property with a friend or family member means the dream of homeownership can be realised much sooner.
PRO: Buying where you want versus where you can afford
Sharing loan repayments with another person can be easier in terms of servicing the loan and may allow you to borrow more. It might mean the difference between buying that inner-city place you’ve always wanted and settling for a suburb you’ve never heard of. By pooling purchasing power you can find your ideal home, which otherwise might have been beyond your budget.
PRO: A burden shared is a burden halved
Buying a property with a friend or family member not only means costs are shared upfront, but also across the life of the loan. The proportion of costs taken on by each person in the arrangement will vary depending on individual circumstances, but as an example, each person might pay half the deposit, half the legal fees, half the monthly repayments, half the rates, half the utilities, and half the insurance.
CON: All care and all responsibility
Although you’ll only need to pay an agreed percentage or amount of the monthly repayments while things are tracking as planned, the entire repayment may become your sole responsibility if your loved one suddenly can’t make their monthly contribution. You are both liable to ensure the full loan repayment amount is paid when it falls due, for the term of the loan.
It’s important to plan for the worst-case scenario: could you make the full monthly repayments if you had to? If your partner loses the ability to make their share of the repayments and you can’t cover the full monthly amount, you may need to discuss your repayment arrangements with your lender.
CON: Restricted capacity to invest in more property
You may only be paying your part of the repayments each month, but if you wanted to apply for another loan you could be seen by the lender to be carrying the full risk of your joint loan. So if you decide you want to expand your property portfolio or take out a loan for a car, you might find you can’t borrow as much as you thought.
CON: Life happens
While home ownership might be a great idea for you and your potential property partner right now, it’s important to talk about what your goals are, both personally and for the property.
Do you both plan to live in the property? What happens if your partner wants to move out and rent out their room? What happens if they want to sell before you do? Will you be in a position to buy them out, and could you afford the costs of refinancing and possibly paying sizable loan fees and/or government fees and charges all over again? These are important questions to ask of each other, and yourself, as you consider making a joint investment.
It’s wise to have things written down in a formal agreement (such as co-ownership agreement) before you actually buy a property; a property lawyer will be able to advise you on the best way to do this.
CON: Legal costs and pre-planning
Unlike a standard purchase, a purchase with a loved one will often involve each party getting legal advice and subsequently having a co-ownership agreement drawn up. Each party in the JV, regardless of their status as either friend, partner, family or otherwise, should seek their own independent advice of a lawyer before entering into a co-ownership agreement.
If you decide to go down the road of creating a formal agreement, such as a co-ownership agreement, it should outline what the co-borrowers need to do before exchanging contracts and ensures they know what their rights and obligations will be once a property is purchased. A co-ownership agreement should also cover issues such as when and how to sell, what happens if someone defaults on their mortgage, issues relating to the land title and how parties can be bought out. It will also often include mediation clauses and the process to resolve disputes between the parties to the agreement.
Even if you decide to dispense of seeking legal advice, before you buy, you need to discuss the details with your loved one. For example, how will you determine fair market value if one person wants out? What will the process be for buying out another partner, if necessary? And what is the process for agreeing to and reviewing an annual operating budget for expenses arising from the property?
Buying a property with another person can reap great financial rewards, but it’s important to have your eyes wide open and be as thorough as you can to ensure you’re prepared for any scenario.
Speaking to an expert is crucial, as they will advise you of the conversations you need to have with your property partner before you take the plunge.
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