Mortgages at mates' rates

A growing group of Australians are pooling funds to buy a home jointly, enabling them to get a foot on the property ladder when they may be otherwise locked out of the market. But the pitfalls of buying with friends or family can outweigh the benefits, unless all parties share a common goal.

Sharing mortgage commitments with one or more people not only helps borrowers to buy sooner, it eases the burden of servicing a home loan and can even mean getting a better home loan deal.

Let’s assume two friends, each with savings of $30,000, combine funds to purchase a $300,000 property and borrow the remaining $240,000. Buying together means they have a 20 percent down payment and therefore may avoid paying lender’s mortgage insurance, which is a costly additional charge for those borrowing 80 percent or more (depending on the lender) of a home’s purchase price.

A larger deposit can also mean tens of thousands of dollars less interest paid in the long run. Using the above example, for a $240,000 home loan repaid over 25 years at a rate of 7.4 percent (the average standard variable rate of the major banks, at the time of writing), the total interest payable is more than $287,000 – that’s on top of the principal amount borrowed! But to buy the same $300,000 property with just 10 percent deposit, the total interest paid rises to more than $323,000 and monthly repayments increase by $220. Clearly, there is merit to sharing housing costs.

Is it right for you?

Mixing finance and friendship won’t suit every potential homebuyer and there are some important questions to answer before buddying up:

–          Can you amicably live together?

–          What happens if your circumstances change – financially or personally?

–          And can you agree on short and long term goals?

Keep in mind this is a business decision that requires strategic planning so independent legal and financial advice should be sought immediately. A written agreement outlining each party’s obligations, home loan repayment strategy and an exit plan is vital.  

When it comes to financing a property there are hundreds of mortgages to choose between, not all of which will suit this very individual situation. So borrowers will need to research the home loan market thoroughly, comparing at least three mortgage options.

However important, the interest rate should not be the only consideration; fees and charges, offset or redraw facilities, break costs and the ability to make extra repayments may also influence a borrower’s decision.

Finally, co-owners should also draw up a plan to fairly split other financial commitments associated with homeownership such as insurance, maintenance costs and ongoing bills, to name a few. There are lots of great online tools available to simplify the process; the governments’ MoneySmart budget planner or a home loan calculator can be good places to start. 

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