What you need to know about buying property with siblings or friends
The average home in the Australian capital cities costs $679,000, according to data from the Australian Bureau of Statistics. Prices are still increasing in most regions at a rate of between 3 and 14 per cent per year, and to make matters worse, many major banks have recently tightened mortgage lending restrictions.
All of the above can make purchasing property in Australia an uphill battle. However, buying with a friend or sibling could be a smart way to get a leg up to reach the first step of the ladder.
The benefits of buying property together
The most compelling benefit of buying property together is the most obvious – splitting the costs.
The most compelling benefit of buying property together is the most obvious – splitting the costs. Assuming you’re buying with only one other, you’ll need half the deposit, you’ll pay half the mortgage repayments, half the maintenance and property management bills, and so on.
This may allow you to purchase property in a better area, to buy a bigger, home, or simply to purchase property earlier than you would have otherwise been able to. With prices increasing the way they are, the benefits of buying property sooner rather than later could be considerable.
Despite all the perks of buying together, there are several risks which you need to be aware of.
The risks of buying property together
Buying property with more people may mean more problems, so generally it’s best to try and purchase with a group of two or three at most. That’s because issues can often arise from changes in people’s circumstances or lifestyles.
For example, what if one buyer changes careers and all of a sudden can’t afford mortgage repayments? In that situation you may be liable to pick up the slack, which could be a struggle. Or what if one buyer decides to move to a new city and wants to sell their share of the home? Again you may be required to buy their share out, or sell the property entirely which could cause financial difficulty.
A well structured home loan can help you minimise these risks, so make sure your speak to a mortgage broker for professional advice before buying together.
Your mortgage structure: Tenants in common or joint tenants
As tenants in common you each own an agreed upon percentage of the property separately.
When buying a home with others you have two main options regarding the way you structure your finance and ownership – joint tenants, or tenants in common. As joint tenants you both have undivided ownership of the entire property. You do not have the right to sell or transfer your interest in the property, and should one owner pass away the other automatically assumes full ownership.
This is the ideal setup for married couples, but for siblings and friends it can be problematic as splitting the property up and going your separate ways can be difficult.
In this situation tenants in common might be the better option. As tenants in common you each own an agreed upon percentage of the property separately, and your portion can be split or sold if necessary. This makes life easier if circumstances change and one owner wants out.
Put your agreement in writing
It may sound overly cautious and your sibling or friend may scoff when you suggest it, but it’s essential you put an ownership agreement in writing. It’s a good idea to get a conveyancer, or property law specialist to help you put this together, but at minimum it should answer the following questions:
- What percentage of the property will each party own?
- How will the ownership be structured? (joint tenants, or tenants in common)
- In what proportions will owners each contribute to the property’s costs?
- How will the property be occupied?
- What happens if one owner is unable to meet costs?
- What will each person be responsible for? (rental income tax, maintenance, insurance etc)
- Will any debt be secured against the property?
- When can one party require the other sells?
- Will any security be held against the property, and in what circumstances will this be released?
- How will decisions be made about what to do with the property?
Signing a lengthy legal agreement with a close friend or family member may feel strange, but if something does go wrong you’ll be happy you took the time to put together a contract.
Act logically, not emotionally
When buying with a friend or family member emotion certainly comes into play. You may trust them completely and think an agreement, or other precautions are unnecessary because of that level of trust and the history you have together.
However, it’s essential that you put emotions aside and take a pragmatic approach to buying property together. If something unexpected happens your relationship is far more likely to come out the other side unscathed if you’ve taken a few precautions and have an airtight agreement in place.