Purchasing a property with a 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 home-ownership 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 home ownership 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 or choosing a suburb or location you’ve never heard of. By pooling purchasing power you can find a more suitable 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. Or you could split a loan in proportions to reflect each partner's equity contribution.
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 sibling 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
By definition you and your partner are agreeing to purchase at the same time. However, it’s equally important to consider the other end of the transaction or investment. In our experience, it is rare that both partners will want to exit the property at the same time. You do not want to put yourself in a situation where one partner's decision to exit ownership precipitates the sale of the property because the remaining partner is unable to finance the purchase of the remaining share.
So at the outset it is important to talk about your respective goals for the property and for yourselves.
Do you both plan to live in the property? What happens if you or your partner wants to move out and rent out their room? What happens if one party wishes to sell before the other? Will you be in a position to buy them out, and could you afford the costs of refinancing and possibly paying sizable loan fees, stamp duty and other 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.
Consider preparing a formal agreement before you buy a property; a property lawyer will be able to advise you on the best way to do this.
Buying a property with another person can reap great financial rewards, but it’s important to have your eyes wide open and be thorough in your planning and analysis to ensure you’re prepared for any scenario. It is a good idea to get some input from a finance specialist so that you can anticipate the impact of any decisions that you may take down the track.
If you would like some more information, please contact me for more specific advice before you take the plunge.