Ask Paul: Should I buy a home with my mate?

Hi Paul,

I am on a disability support pension and I have just inherited $100,000-plus. I know I can't buy a house with that amount.

My best mate, who is a tradie and someone who stepped up when I was going through my treatment over eight years, has suggested we buy a house together (in north Queensland). He was going to buy anyway.

He's a good bloke, we are just mates of 15 years, we're not a couple and we don't live together. It seems to make sense to get out of the never-ending rental cycle.

I've heard of a Mortgage Mates loan. Can I do this without losing my pension? Is this the way to go? - Andrea

An inheritance is always bittersweet, Andrea. Obviously, someone you care for has died, but I think that they would be delighted that you plan to use the inheritance to purchase a home with your friend.

I am sure you have seen the same thing happen. For me it is an all-too-common story: friends invest together and due to the lack of an agreement between them, tensions flare and friendships can be destroyed.

So, before we look at the money stuff, let's look at the far more important friendship stuff. If you do buy together, I really want you to have a written agreement.

You can buy a home as tenants in common. This is easy to do with your solicitor, who you would use to handle the purchase.

You and your friend could put in exactly the same amount and you each own 50% of the property, or you could put in different amounts. If he put in 60% of the money, he could own 60% as a tenant in common and you could own 40%. This is a key thing you need to decide and put into your agreement.

Then you have quite a number of things you need to agree on and document. Some of these are factual.

This would include: how do you share the costs of the property, such as insurance and rates, what maintenance plans do you have for whatever house you buy and how are those costs shared, what do you do if one of you wants to sell but not the other, what happens if one of you falls ill or, in an extreme event, dies?

Yes, a lot of this is pretty horrible stuff. But I have learnt over the past four decades an important money rule: if you plan for the worst, it rarely happens.

So have a good, solid, written agreement. Your solicitor could be involved here, at least to make sure it is correctly signed. You don't need legal mumbo jumbo; this would be a commonsense agreement.

Then there are the 'living together' issues. These are more personal: things such as who gets a bigger bedroom, splitting food costs and 
the usual day-to-day stuff. These don't really need to be in an agreement, but should be discussed. In a way, this is the hardest part of buying a home together.

Now we can look at buying.

Prices look promising

I checked out the region in north Queensland where you want to buy and I was pleased to see the median price is about $400,000.

Median is not the average - it is the middle price of all local property. Half the homes in the region where you want to buy are less than $400,000 and half are more than $400,000.

This price level was a relief for me to see. I was concerned that you might be trying to buy in a capital city, where your deposit and pension will not go far.

Here, though, if you went 50/50, you would need about $200,000. In Queensland, there is no stamp duty for first home buyers paying under $500,000. An obvious question, though, is whether your friend has bought a home before?

As you have more than $100,000 from your inheritance, and you would no longer be paying rent, I would suspect your repayments on a small mortgage would be around the same as, or possibly less than, your rent. You mention Mortgage Mates - frankly, I had never heard of them.

I always enjoy learning about money ideas, and their concept of helping people to 'find a new mate' to buy with is an interesting, if somewhat terrifying, concept. It is worth reading their tips about co-owning. I think you will find that helpful.

But in terms of a mortgage, I want you to go for the cheapest on offer. Now is the time to talk to your bank, or you may find that a good mortgage broker can recommend a lender who is interested in a small mortgage and can take your situation into account. There is no point going any further until you find out exactly how much you can borrow.

A piece of good news is that a home is an exempt asset for pension purposes, though it could impact you if you are getting any additional payments as a non-homeowner.

Please check, based on your personal situation, with Services Australia, formerly Centrelink.

I have piled a fair bit on you here, Andrea, but I know that if you and your friend put the effort into how a purchase could work for you both and document this, you maximise your chances of a successful purchase.

Most importantly, you also set the framework to maintain what is obviously a good friendship.

I do hope this goes well for you and your friend.

Get stories like this in our newsletters.