The pros and cons of buying property with friends
Buying a home is no cheap exercise. It's tough for couples to muster up a deposit, but for solo buyers high prices can make home ownership little more than a pipe dream.
One solution can be co-buying. Combining forces with a like-minded buyer can boost your purchasing power. The catch is that it can also be a minefield with plenty of potential pitfalls to ruin a relationship.
We talk to the experts to know what to avoid - and the steps to take - to make co-buying work.
Caylum Merrick, team leader of finance at Perth-based Momentum Wealth, says co-buying arrangements are quite rare.
"Most people buy property either by themselves or with their partner.
However, given the affordability pressures we are seeing, especially in Sydney and Melbourne, it's possible we may see rising interest in co-buying."
Where co-buying does happen, Merrick says it usually involves siblings, or parents and an adult child buying together.
"Occasionally you will see friends go into a shared investment, but in this case there is usually a development angle to the purchase."
David Thurmond, mortgage broker and principal of Mortgage Choice in Melbourne's Berwick, agrees that co-buying isn't the norm.
"It's generally not something I encourage with my customers. There are a lot of risks involved," he says.
That said, Thurmond believes co-buying has a better chance of working where it involves family members because "there is more trust, and both buyers have a stronger alignment to future goals".
Finding a fellow buyer and a property you both like could be the easiest part of co-buying. Financing the deal can come with hidden surprises.
Can you afford the whole loan?
Caylum Merrick says that in an ideal world, each party would have a loan in their own name, rather than a joint loan in both names. The downside is that very few lenders offer this structure. "Most lenders will structure the mortgage as a joint loan," he says.
This can be the deal breaker for would-be co-buyers because a joint loan makes each borrower jointly and severally liable for the total loan. Put simply, if your co-buyer loses their job, falls ill or for any reason can't (or won't) keep up their share of the repayments, the lender will expect you, as co-borrower, to stump up 100% of the repayments.
This being the case, Thurmond says as part of the loan approval process banks want to see that each borrower can individually afford to repay the total debt on their own.
"If two people buy a property 50:50 using a shared home loan for $300,000, most lenders will want to see that each borrower could individually afford to make repayments on the full $300,000, not just $150,000."
This can be problematic if one co-buyer is a low income earner.
"If one person is earning $20,000 and the other is earning $100,000, you would have very few banks to choose from," says Thurmond.
How to "own" your property
Along with the way the property is funded, co-buyers need to decide how the property will be owned in a legal sense.
Peter Bobbin, principal lawyer at Coleman Greig, says, deciding the ownership structure is something that needs to be sorted out early. "Title for a property can't be registered without noting the style of ownership."
When buying property with someone else there are two main choices in the way it is held.
"Joint tenancy is one style of ownership where people own co-jointly, and with right of survivorship," says Bobbin. This means if one owner dies, the other co-owner automatically gains the whole title.
"All you need to do is complete a form with the land titles office and provide a copy of the death certificate, and the other joint tenant is removed from the title - no probate is required.
"Joint tenancy is the common structure for many first-time married couples. For second-time marriages, as well as friends, siblings and even a parent and adult child buying property together, the most common arrangement is tenants in common (TIC)."
TIC lets each person own a portion of the property separately and independently. There is no right of survivorship. If one owner dies, what happens to their stake is determined by their will.
Under TIC, the ownership share doesn't have to be 50:50. You can own 20% of a property while a co-owner has 80%. This ability to clearly express your share of ownership is a key benefit of TIC in a co-buying situation.
It's worth noting that co-buyers aren't necessarily locked into a particular type of ownership.
"It is easy to change from a joint tenancy arrangement to TIC without crystallising either a stamp duty or capital gains tax liability," says Bobbin. "It can be done by one person - it's not necessary for all parties to agree. However, moving from TIC to joint tenants does require all parties to co-operate."
There are other potential ownership structures beyond TIC and joint tenants. However, these tend to apply to niche situations.
• Creating a life interest
This is most often used in personal estate planning, especially in second relationships. According to Bobbin it gives a surviving partner who doesn't have a legal interest in the property somewhere to live for the rest of their life.
• Granny-flat eligible interest
This is very common today, says Bobbin. "It is a method whereby parents can help a child buy their family home, and they co-jointly share it. The child is the owner, and under the agreement the parents have a right to build and live in a granny flat on the property."
• Company title
Before strata laws, company title was a common method of owning an interest in an apartment.
"The whole building was legally owned by a company," says Bobbin. "Entitlement to occupy the apartment was linked to the particular class of shares that were issued to each person in the building."
Agreements help protect everyone
The most important document you sign may not be the contract of sale.
David Thurmond, of Mortgage Choice in Melbourne's Berwick, recommends that co-buyers speak to a solicitor to arrangement a formal co-owning agreement.
"It's not bulletproof and it's not a formal requirement," he says. "But it can help buyers determine what will happen in the future."
Readymade co-ownership agreements where you fill in the blanks are available online for as little as $149.
That's a fraction of the cost you'll pay for a tailored agreement drafted by a solicitor. Scrimping here, though, can lead to much bigger costs later if co-buyers resort to legal action to solve disputes.
A co-ownership agreement should ideally address:
• How property-related bills will be shared, and who is responsible for paying them.
• How each owner is entitled to access if the property if one or more owners don't live there.
• Who will maintain the property.
• How any disagreements relating to the property will be resolved.
• What happens if one owner wants to sell up or exit the arrangement.
Special loans can be an option
Commonwealth Bank offers Property Share, which is specifically pitched at co-buyers. It lets each borrower choose their own loan amount, loan type, loan term and repayment structure. This way co-buyers can split the property cost while keeping their finances separate.
To be eligible for Property Share, all borrowers must agree to guarantee each co-borrower's home loan and seek independent legal advice before entering into the arrangement.
Think about personal insurances
It makes a lot of good sense for co-buyers to review their personal insurances, particularly income protection cover, before signing up for a shared mortgage.
Having appropriate income insurance means both co-owners should be able to keep up their loan repayments even if illness or injury prevents them from working for a set period.
How it works: an aunt comes to the rescue
For Sydneysider Marie Whitford*, co-buying has been an opportunity to get off the rental treadmill and buy a first home sooner.
Whitford faced the classic first home buyer conundrum. She earns a decent salary, but paying high Sydney rents made it near-impossible to save the sort of money she needed to save a decent deposit.
"My rent for a one-bedroom unit was $400 a week. I was comfortable spending that and had accepted I would likely be a life-long renter," she says.
That all changed when her aunt came up with the idea of buying a place together.
The duo combined resources, paying $630,000 for a one-bedroom apartment in Sydney's popular inner west.
"My aunt put in just under $200,000, including paying the full deposit. She owns 31% of the apartment," says Whitford. "I own 69%, which is the whole mortgage. I will live in the apartment alone."
A lawyer helped the two women clarify the terms of ownership. Importantly, Whitford's aunt has no liability for the mortgage at all, though she had to pay stamp duty on her 31% portion of the property, which came to about $5000. Whitford was eligible for the first home buyer exemption, and so was able to avoid stamp duty.
"My aunt has repeatedly assured me that she thinks the apartment is a good investment for her but, ultimately, she is doing it to help me get on the property ladder," says Whitford. "I am very grateful to have someone like her in my family.
"My mum and aunt purchased their first home together because they were both single at the time. They say they never would have got on the property ladder without each other."
*Not her real name.
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