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What to know before buying a house with your parents or anybody else
As property prices rise to eye-watering levels, first home buyers who feel locked out of the property market may consider pooling their resources with family or friends to purchase a home together. The idea sounds good in theory, however there may be a few creases to iron out before you take out a joint home loan with your father, mother, brother, sister, or even friendly Joe at work, for that matter.
For instance, you may be purchasing a property with your partner and your dad, but have you considered who will be living in the house? That leads to another question; would everyone buy as an owner-occupier (which means everybody stays together in the house), or some members own a share of the property as an investment? This is important as investors need an accurate record of how much money they pool into the property to claim any available tax deductions. It’s also worth checking whether you’ll be paying any rent to use the part of the home held as an investment by another member.
Another logical question is that of ownership – who owns what percentage of the property? This may be based on whether you hold the property as joint tenants or tenants in common. Tenants in common may divide the mortgage and the property according to the amount of money each person chips in, while joint tenants will always have an equal share. Also, what about the costs? Suppose you are taking out a joint mortgage with your father and you both pay 50 per cent of the deposit each. In this case, how will you split the other costs, like stamp duty and insurance, or even the maintenance costs once you move in? Will everybody pay an equal share, or will the costs be divided according to ownership?
It’s usually a good idea to draw up an ownership agreement with the help of a legal professional, setting out everybody’s rights and duties and who’s going to pay for what, to avoid any money issues down the line. Financial issues can ruin the best of relationships, and it’s best to clarify things at the outset to prevent any trouble in the future.
Besides these questions around who’ll stay where and how the regular expenses will be divided, an important point worth considering is the proper loan structure for the property, as discussed in the next section.
Joint tenants or tenants in common?
While it’s not unusual for more than one person to share a mortgage, there are two common ways in which this may be done. The first is the joint tenants arrangement. In this arrangement, all the owners are equally responsible for the mortgage, and their entitlement to the property is also equal. If one of the joint tenants passes away, their share is automatically transferred to the living members who are part of the arrangement. The downside is that you’re automatically responsible for your partner’s mortgage if they default or refuse to pay their share.
Joint tenancy is usually preferred by couples or adult children buying with their parents, but you may want to consider a different arrangement when buying with friends or other family members. For instance, as tenants in common, you can divide the mortgage in any ratio you like.
Suppose you’re taking out a joint mortgage with your brother. As tenants in common, you can choose how you divide the mortgage, whether 50/50, 60/40, 75/25, or some other ratio. In case you both decide to part ways in the future, one partner can offer to buy out the other’s share in the property. You’re also free to sell your share in the property or gift it to someone else unless there’s a clause stating otherwise in your ownership agreement.
It helps to discuss your plan with an experienced broker and legal professional or solicitor to select the right mortgage structure for your family when buying a place together. If a joint home loan doesn’t appeal to you, another option worth exploring is a property share loan. While such loans are uncommon, they can alleviate some of the financial issues when buying with friends or family.
What is a property share home loan?
Unlike a joint loan where each partner is responsible for the entire mortgage, a property share loan works as two home loans secured on a single property. As a result, each member is individually accountable for their own mortgage, meaning they can maintain their financial independence and retain complete control over their share of the property. However, it’s worth noting that property share home loans are relatively uncommon. You can read more about Property Share loans on this factsheet issued by Commonwealth Bank or speak with a broker to understand the product in detail and whether it’s suitable for you or not.
Irrespective of the type of loan you apply for, it’s worth seeking legal and financial advice before purchasing a property with family members and friends. Also, remember that your borrowing capacity and eligibility for a loan will depend on the income and credit score of each member applying for a mortgage with you. If anybody in the pool has bad debt on their credit file or doesn’t meet the standard eligibility criteria for lending, it could make it challenging for the others to get approved for a home loan, or you may be offered a higher rate of interest to make up for the higher risk in lending to a non-conforming borrower.
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