Despite record low interest rates, housing affordability remains a concern for a majority of Australians. The median house price in Sydney, the most expensive city in Australia, is $640,000 and figures from the Australian Bureau of Statistics show that prices grew 6.1 percent in the year to June 2013.
In this environment of soaring prices, more and more Australians are entering the property market in partnership with friends. Together, you can pool your resources and buy a home earlier or in a better location that you could if you go it alone.
It sounds good in theory but it’s wise to take steps to ensure things don’t descend into chaos.
What can go wrong?
Lawyer John Wojtowicz, partner at Civic Legal and director of Law Central, says buying a property with friends or other co-investors is essentially entering into a micro-business arrangement. As such, you should know your partners well and ensure you are on a financial level playing field.
“You shouldn’t do these co-purchasing arrangements unless you are both in a similar financial position,” Wojtowicz advises. If one friend has an unstable income, you may soon end up in a nightmare scenario of having to financially prop up your less-than-equal partner.
Depending on your home loan, you may also be held liable for the entire loan if your friend defaults on the mortgage.
Reach an agreement
Before you jump into joint ownership with one or more friends, Wojtowicz recommends discussing what each of you wants out of the arrangement and ensuring you have similar intentions. Is the plan to live together in the property as housemates or will the property be tenanted? Will you seek to sell in five years, 10 years or hold for longer?
All of the above should be outlined in a legally binding agreement. “You need an agreement to regulate your arrangement. Without one, you can end up in all sorts of issues,” Wojtowicz says. “For example, what happens if one person wants to sell and the other doesn’t? An issue like that can end up at the Supreme Court and cost you more than $20,000.”
The primary purpose of a written agreement is to stipulate what happens if one party wants to exit the arrangement – typically, you would give the co-purchaser first right of refusal to buy you out and have the property valued – but is also covers other aspects of the arrangement, such as the financial split on expenses and maintenance; whether you will renovate the property or leave it as is; whether you will live in it together or rent it out; and other contingencies.
If you feel confident enough to manage your own agreement, you can buy a standard Joint Purchase Agreement for Property from lawcentral.com.au.
When you buy the property, you must also ensure that the title is tenants-in-common rather than joint tenancy so that in the unfortunate event of a death, the property is passed according to a will. In joint tenancy, the property automatically passes to the joint tenant – in this case, your friend.
Find the right loan
Choosing the most suitable home loan for your needs comes down to research and comparing the various options available. For example, the Commonwealth Bank’s Property Share Loan allows two parties to take out separate loans for the same property. Or you may take out one loan and split it into separate portions.
You can also decide whether your portion of the loan has a fixed or variable interest rate, and each party can choose the size and frequency of their repayments. Take a look at the more than 2000 home loans compared on RateCity.com.au and talk to the individual lenders for a clearer idea of your options.