With the house prices on the rise, many Australians are turning to sharing a mortgage in an effort to get on the property ladder. For many, it’s a boost onto the property ladder, opening up a wider housing market and reducing the initial financial burden, but it’s important to beat in mind that there are some risks which could leave you caught out.
For most first-home buyers, the biggest hurdle to overcome is the deposit. As a single-income earner, you can save scrupulously for years, but in a competitive housing market, just the amount required for a deposit may well be increasing faster than you can save on your own, and you’re severely limited in your housing options.
John has saved $35,000 over several years, which will only net a modest property with a 5%-10% deposit. If he instead bought a house with his friends Rose and Tim, both of whom also have $35,000, together they could purchase a house at $500,000 with a 20% deposit, which will generate more income as a rental property (or be more appealing to live in, depending on your intentions), have a shorter loan term and produce higher capital gains when it is time to sell.
The ongoing mortgage costs are also much lower when split between three parties, as you can take out a shorter loan period, knock out the mortgage faster and potentially save tens of thousands of dollars. With John, Rose and Tim’s $500,000 home, each pay (on a 15-year mortgage at current market rates) $255 per week, or $1020 per month, which is on par with renting in many cities. Other associated homeownership costs, such as rates and maintenance, are also shared. Remember, though, when it’s time to finally sell, any money you made will have to be split between you and your friends – shared costs also means shared profit.
As with any shared financial arrangements, purchasing a property with friends may have its downsides. No single person has control over the property, and most decisions will have to include some compromise. It’s possible that one friend may wish to sell up early to liquidate assets, and if you’re unable to buy out their share of the property, the case can go before the courts. This could include further strain of the seller wanting to see a return on their investment if you purchased your property some time ago.
Another issue is if one of your friends are unable to make mortgage payments. Despite the best intentions, circumstances can sometimes change without warning, leaving you with the entirety of the debt. Because you will be responsible for the mortgage if another party defaults, other financial providers will take the entire mortgage value into account when you apply for a personal loan or a car on finance. This means that you may have to pay a higher interest rate or face a lower borrowing threshold.
Shared property arrangements that fall apart do so due to the relationship deteriorating over financial and personal decisions, which is avoidable. Make sure there’s no hidden debt or harmful spending habits with your friends and maintain ongoing verbal and written communication, get a lawyer to draw up a co-ownership agreement to protect your share of the investment if you choose to go down that path.