If buying a house is on your mind, but you just can’t get a deposit together, or you doubt your ability to handle a mortgage on your own, you might be contemplating buying a property with a friend. Doing so could benefit both of you as you share the costs of the deposit, repayments and bills.
However, there are caveats and pitfalls you should be aware of when weighing a potential long-term financial arrangement such as this.
What to consider when buying a house with a friend
You wouldn’t want to make such a big financial commitment as buying a property with anyone other than someone you trust entirely, like someone you’ve been friends with for years. That’s true whether you intend to live with that person or go in on an investment property.
Your financial goals should also be in sync so that one of you doesn’t opt out after only a few years to travel overseas, for example.
Additionally, you and your friend should be open about your finances and what you can realistically afford. If, for example, your friend is relying on their parents to get a deposit together, that should raise concerns about their ability to repay their share of the mortgage.
Once you’ve agreed on the type of property you want and its location, you’ll then need to work out the best strategy to obtain the mortgage in the first place and to pay it off as easily and painlessly as possible.
Fees and features
There are also plenty of things to factor in, including up-front fees, such as stamp duty and conveyancing fees. You should also see whether you are entitled to any Federal or State first homeowners grants. At any rate, it’s easy enough to go online or check with your prospective lender.
You’ll also want to discuss the various mortgage features, such as offset accounts or redraw facilities, whether to opt for a fixed or variable interest rate at the outset, and whether you want a split loan facility whereby you have individual loans that you pay down by yourself at a different rate to the other mortgage holder or holders.
The details of the arrangement
You may also want to talk to a mortgage broker with expertise in joint mortgages who can find you a highly competitive deal among the lenders they deal with. Mortgage brokers charge the lender, not the borrower, so it doesn’t cost you anything to engage one.
To be sure you’re on the same page — and this applies to buying a property with anyone, including a relative or parent. It might be worth getting a solicitor to legally document your obligations to avoid disputes arising in the future. Those documents would include all the relevant details of your joint ownership, such as splitting all monthly expenses, for example, electricity, if you’re living in the property, as well as mortgage repayments.
» MORE: How to find a mortgage broker
How do you buy a property with a friend in Australia?
Buying a property with somebody else involves taking out either a joint tenancy or a tenancy in common arrangement. Joint tenancies tend to be taken out more by married couples or partners because they involve a 50-50 split in ownership, where one of the owners is responsible for the other in the advent of a default. Also, one partner inherits the other’s share in the advent of death.
Friends and relatives tend to favour a tenancy in common arrangement because it offers greater flexibility regarding shares in the property. It is also not restricted to just two owners and allows one party to relinquish their ownership without agreement from the others or with the property necessarily being sold.
Lenders will have differing policies, but, strictly speaking, there is no limit on the number of people that can take out a tenancy in common mortgage. So, you could even buy a property with a group of friends.
Pros and cons of buying a house with a friend
As with nearly all things property-related, there are both good and bad points to buying a house with a friend, which are listed below.
- Opportunity to get into the market. Saving for a deposit can be a nightmare, especially with the price of real estate in cities such as Sydney and Melbourne. By pooling your deposit savings, you and your friend can potentially get a foothold in the market much quicker than if you had to save up a deposit by yourself.
- Greater borrowing power. Having two incomes should give you greater borrowing capacity to buy a larger and potentially nicer home to invest in, just as long as you know that a bigger mortgage means bigger repayments.
- Your share of the mortgage and fees is much less. Sharing the monthly repayments could be highly beneficial, especially when you factor in council and water rates, all your monthly bills and expenses, such as electricity and insurance. Sharing the burden could also free up funds to invest or pay off the mortgage faster.
- Split loan facility. As discussed above, most lenders allow a split loan facility where you can pay your loan separately from that of the other mortgagee(s), which means you’re not encumbered if your friend does not want to pay the mortgage off at a faster rate or vice versa. Having a split loan also provides you with far greater autonomy when making financial decisions.
- No obligation to take an even share in the mortgage. With a tenancy in common arrangement, you are not obliged to take a 50% stake in the property, so you could borrow more or less, depending on what you or your friend can repay. This is a far more flexible arrangement than if you had to pay off the mortgage by yourself or you were in a joint tenancy arrangement.
- Potential to pay off the mortgage sooner. Having someone else share in the mortgage repayments means you could potentially pay off the mortgage much sooner than the 20 or 30 years you sign up for. Having similar goals at the outset should help to clarify this situation once you start making repayments. Remember, you can usually withdraw the funds you have paid above the minimum required in case of an emergency.
- Either of you could struggle with the repayments. There are no guarantees, despite the best intentions of everyone involved, that both of you will always be able to make your repayments. Circumstances change, and it’s a good idea to have at least some type of contingency plan in place in case either of you lose your job or find yourself in mortgage stress. That’s especially true if there are more than two parties involved in a tenancy in common arrangement.
- The relationship could break down. Further to the above point, people change over the years, and relationships, even among very close friends and relatives, can suffer due to disagreements over a range of things. That’s why you need to be sure of the other person before you commit to borrowing hundreds of thousands of dollars. Even then, consider talking to a solicitor about a legally binding agreement where you each understand your obligations.
- Selling could become a problem. If only one of you wants to sell, this could be an issue. You or your friend could sell your share in the property to someone else, but this whole process is bound to be far more complicated than if you simply owned the property on your own.
- Credit rating could suffer. As joint borrowers, both you and your friend — or friends — will have your names on the mortgage, and in the event of a default, your credit rating could suffer. Additionally, this may harm your ability to borrow in the future.