Buying your first home with your partner, friends, or family members can be a great way to get your foot on the property ladder - but there are plenty of factors to consider before going ahead with this arrangement.
Shared home ownership is common amongst couples. But with property prices well above pre-COVID levels, some younger buyers have opted to buy a property with friends or family to help speed up the process, increase their borrowing power, and reduce costs.
There’s a lot to think about when applying for a joint home loan, so here’s how the process works and what you may need to weigh up.
What to ask first when you’re considering a joint home loan
Before you go and hastily apply for a joint home, here are a few questions you should ask yourself.
Who are you buying with?
You want to ensure you’re choosing the right person or people to buy a property with. After all, you want the experience to be positive, now and in the future.
Are you applying with your spouse or partner, your parents your parents, your best friend, or your sister?
Work out who the specific parties are and whether you have the same goals (short and long term) - will you buy as an owner-occupier or as an investment property?
Generally, the less people involved in buying the property means less opinions and disagreements, and also a greater share of any income the property generates. On the flip side, the more people applying for the home loan, the more affordable the property becomes for you.
How much does everyone have to contribute?
The next important step is working out everyone’s ownership share i.e. 70:30. Generally, this number depends on how much each person initially chips in for the purchase of the property. Not only are there repayment shares to work out, but also regular expenses such as council rates, insurance, and the like.
This is where the final step comes in.
Should we get a lawyer involved?
Applying for a joint home loan is a big commitment and also a lot of money. It’s important to iron out all the details before taking the final leap, so obtaining legal advice and creating a legally-binding agreement can help provide clarity in the case that:
- Someone decides to sell
- When to refinance
- How to split mortgage repayments
- How to split any other costs associated with the property
- Someone defaults on their repayments
Joint home loans with current homeowners
It is possible to purchase a property with someone who already owns a home, like your parents. However, if any of the co-buyers have owned property before in Australia, you will not be eligible for the First Home Owner Grant (FHOG). The FHOG is available for first-time buyers who are buying a brand new or extensively renovated home.
If you’re considering a joint home loan with current homeowners, it’s important to have everything spelled out in a contract. Hiring a lawyer or conveyancer can be a good place to start.
What structure of ownership do you want?
When it comes to a joint home loan, there are typically two options in terms of ownership structure - tenants in common or joint tenancy.
Tenants in common is when each party has a proportionate share in the property i.e. 60:40. Each owners stake in the property is typically based on the proportion of their funds they initially brought to the table. For instance, if you contributed 60%, you will own 60% of the property while the other party owns 40%. In this scenario, each person can sell their share of the property at will - generally there’s a lot more freedom and flexibility with this form of ownership.
On the other hand, joint tenancy is when both parties act as a single entity and are responsible for the entire property together. If one of the owners passes away, the surviving tenant takes the whole property. With this type of ownership, one owner cannot sell or bequeath their share of the property to someone else. If they wanted to go down this road, they would likely need to go to court to force a sale of the property.
Benefits of buying a home with friends or family
Entering a joint home loan with a friend or family member can certainly have its advantages, as long as both parties have a mutual agreement on all key decisions.
- Gives you greater buying power: you may have the capacity to borrow more money and pay off your loan sooner than you would by yourself. In turn, this could allow you to buy a newer, bigger property in a better location.
- Can enter the property market sooner: It can take up to 10 years to save a 20% deposit 20% deposit to purchase a home. If you trust the person you’re looking to buy with, this could speed up the process significantly. After all, not everyone has a partner or spouse to buy a property with.
- Save for a deposit sooner: Again, with a friend of family member, you could combine your savings to form a large lump sum and potentially avoid paying lenders mortgage insurance (LMI).
- You’re in it together: If one of the parties lands in hot water or has any concerns i.e. misses a repayment, you have someone there to support you. This only works if both parties in the joint home loan trusts one another.
- Risks of buying a home with friends or family
While buying a home with friends or a family member means you can lean on one another when times get tough, it doesn’t necessarily mean that the homeowner journey will be smooth sailing. There are potential risks you’ll need to consider when applying for a joint home loan:
- Difficulty selling the property: If one party wishes to sell the property or move out while the other doesn’t, this could be a lengthy process and cause significant strain on the relationship.
- One party can’t repay their part of the loan: Applying for a joint loan means you go on the application as joint borrowers. If one party can’t keep up with their share of the mortgage repayment or they lose their job, the other party is responsible for the tenure mortgage repayment. Essentially, the whole loan is passed onto them.
- Borrowing capacity can become compromised: If you’re planning on applying for another home loan, the lender will take into account your existing debt commitments and mortgage repayments. This means your capacity to borrow may be reduced. For instance, one person might want to get their own place with their own partner down the track, but both parties are jointly responsible for the loan.
- Breakdown of relationship: Disagreements or any of the above scenarios could cause a relationship break down.
If you’re ready to get the keys to your dream home, or wish to learn more about joint home loans, book a call with loans.com.au’s friendly team of lending specialists. We’re here to help.
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