Friends and family members are increasingly entering into joint property partnerships in a desperate bid to get onto the property ladder. While it can be a great shortcut, it's not without risks.
Australians are getting more desperate to jump onto the property ladder as rents continue to rise.
A Mortgage Choice report found rental increases to be the prime motivation for 51% of respondents looking to buy property. Meanwhile the escalating cost of house prices is also influencing many to make the leap.
“There’s a real sense of urgency among those with home ownership in their sights, a persistent feeling of it’s now or never,” said Mortgage Choice spokesperson Kristy Sheppard.
“In the past couple of years these Australians have observed significant price rises for both units and houses and now they’re starting to see rental costs jump up. Every month of saving for a deposit must feel like a long time to wait and watch an ever-changing landscape.”
The difficulty of saving a deposit and the high costs of housing is forcing many to come up with some creative solutions to the housing problem.
The Mortgage Choice survey found 2% of potential first homebuyers were looking to buy with a friend, while another 2% will buy with family other than a sibling. About 1% will buy with a sibling. There are two major benefits to buying in a partnership, as opposed to flying solo. The upsides include:
- potential to access double the deposit
- double the income to secure a home loan
But with those benefits come some pretty huge risks.
Smartline’s managing director Chris Acret points out that the main negative is the way banks view the commitment and the impact of that commitment on future borrowing.
For example, two brothers purchase an investment property together for $400,000 and plan to rent it out for 20 years. However, when one of the brothers goes to purchase a home with his new wife five years down the track, the bank doesn’t view him as having a $200,000 liability (50% of the investment property) it views him as potentially having a $400,000 debt. As a result, the amount he is able to borrow is severely limited. So the brothers either have to sell the investment property (which the other brother might not want to do), or the married couple must delay their own plans.
Fortunately there are several ways to avoid these kinds of complications. Here are our top tips to help you avoid getting into a property partnership from hell.
- Buy with someone who has similar property goals. For instance, both parties agree to purchase an investment property that they will sell in five years
- Buy with someone who is at a similar stage in life. A good example might be two single friends who have already graduated from university and are making professional wages
- Buy with someone that has similar values about money and financial commitments. Problems crop up when one person pays the bills and mortgage diligently, while the other constantly has problems making ends meet. If your partner can't make the loan repayment, you will be held responsible.
- If living together, ensure you will be compatible flatmates and discuss potential sore points, like visitors, parties, pets and romantic partners.
- Consider purchasing income protection, disability and life insurance. This will protect you should you be unable to work for a period of time.
- Go in as equal partners
- Get legal advice
- Have a frank and thorough discussion about possible changes in circumstance
- Make a formal agreement that covers these issues:
- What happens if one party defaults on the loan?
- What happens if one party moves interstate or overseas?
- When it comes to sale of property how will capital gains be split?
- Can one party buy the other part out?
- If only one partner wants to sell, who will pay the selling cost?
- What happens if the property is damaged?
- If the property is an investment, who will manage it?
- What happens if you can’t find suitable renters?
- How will property maintenance bills be split?
- What renovations do you want to make and who will pay for it?
- Keep detailed records of who pays for what. This will help nip arguments in the bud and should things completely go sour it can be used as evidence in court.
