Buying a House with Someone Else: 5 Easy Tips
Ballooning property prices in capital and regional areas around Australia has driven deposit amounts higher than they have ever been before. Those looking to buy into Aussie property are having to get creative in how they can attain the funds necessary. A rising example of this is individuals combining their financial assets with family members, friends or romantic partners to afford these larger deposits. Buying property in this manner comes with its own challenges. Here are some tips from Vision’s property and finance experts on buying a house with someone else.
1. Make Agreements In Writing
Co-buying a house with a family member, friend or romantic partner is different to other agreements you have made previously. A mortgage is a huge financial commitment over several years. The situations and goals of signatories on the loan may change and has the chance to derail a mortgage agreement made between two or more people. When you are drafting up a mortgage agreement, you need to determine:
- how will you split the costs of owning a home (maintenance, property management, insurance)
- the goals of the property (will it be used as a rental, sold immediately, lived in by an owner?)
- how the home will be financed (how will the deposit and mortgage repayments be paid/split)
- the exit strategy
- the financial default plan
2. Determine the Type of Co-ownership Agreement
Co-owners need to consider the legal structure of their agreement. This is so the value of the mortgage can be appropriately apportioned in case one of the co-owners passes away.
A Joint Tenancy means that the value of the property is split equally between the co-owners. If one of the co-owners passes away, the value of the mortgage is passed on to the other co-owner(s). Alternatively, a Tenants in Common agreement means that each co-owner can nominate who they wish to apportion the value of their ownership of the property. A Tenants in Common agreement also allows for a split of the contribution to the value of the property to be determined.
For example, if James and Jenny were in a Joint Tenancy Co-ownership Agreement for a mortgage of $500,000, each would be legally entitled to 50% of the value of the property. If James were to pass away, Jenny would receive his 50% stake.
If James and Jenny were in a Tenants in Common Agreement for a mortgage of $500,000 with a 70/30 split, James would be legally entitled to 70% of the value of the property. If James were to pass away, he could nominate Jenny, or anyone else to receive his $350,000.
A mix of both of these agreements can also be arranged if it best fits your circumstances. Before agreeing to any form of Co-ownership agreement, speaking with financial and property experts is highly recommended. This will help you make the best-informed decisions about your financial future.
3. Be Smart with Who You Choose to Buy a House With
When determining borrowing capacity for co-ownership arrangements, banks look into each co-owner’s financial details.
- Does the other co-owner have a consistent source of income?
- Do they have a significant level of savings?
- What are their spending habits like?
- What other financial commitments do they have?
- Do they have the same plans for the property as you?
These are key questions to ask yourself when buying a house with someone else. If other co-owners are unable to fulfil the financial commitments of the mortgage, this negatively impacts you, as you are associated with this bad debt.
A key point to remember is that if a co-ownership agreement fails, it isn’t just a significant financial loss between both parties. Long-standing relationships between friends, family and partners can be lost as well. Be cautionary and deeply consider other co-owners in any mortgage agreement.
4. Explore Different Ways to Split the Property
Splitting a property evenly amongst co-owners sometimes isn’t always the best option. Being open and honest about savings and the level of income between co-owners is a good way to determine how the split of mortgage repayments should be done.
For example, James has a lower level of income but has received a significant inheritance from a deceased relative. Jenny has recently received a promotion at work and has a higher level of income, but a low level of savings.
James could opt to pay 80% of the deposit, but then pay 30% of the mortgage repayments over the course of the loan. Jenny would pay 20% of the deposit, but then pay 70% of the mortgage repayments. An agreement could be struck that James would end up with 35% of the value of the loan, and Jenny ends up with the other 65%.
Negotiating a split that best fits the financial capabilities of the co-owners means that there is less chance of a co-owner experiencing mortgage stress and being unable to make payments.
5. Be Patient
It is easy to get caught up in the incredible growth and buzz surrounding Australian property. When you are looking to buy a house with someone, you may both be tempted to throw caution to the wind and jump on any property that’s available and in your price range. However, there are multiple factors that determine property price growth, such as infrastructure, interest rates, and location. If the market turns, and you and other co-owners haven’t considered other factors, you may experience smaller returns or even a loss.
When buying a house to live in, or to invest in, speaking to an expert will save you time and money in the long run. With over 20 years in providing award-winning property and finance advice, Vision Property and Finance is here to help. Get in touch with us for a free chat here, or use the chatbot on the page.