Thinking of buying with family?
Buying with family
There are many different reasons to buy a property with a family member. And I don’t mean your husband, wife or partner. I’m talking about your mum & dad, brother or sister, aunt, uncle, cousin, the list goes on and on…..
You may be thinking of buying in with your parents, maybe to help look after them in their older years not just them going guarantor for you? Maybe you and a cousin already flat together and decide it would be a good way to get your foot in the door in the property market as first home buyers? Or maybe you already have your own property and are looking to dive into investing with a sibling? Wondering where to start?
Property Share Loan
We have access to one major lender that has a ‘property share’ home loan option which means you can invest with one or more people splitting the cost but also maintaining separate finances. Let’s break down some pro’s and con’s of this type of loan.
Advantages - Each party can set-up their loan their own way, the loan amount and loan term plus any features, benefits and interest rates can suit each individual entity, the type of loan can be different (i.e. Fixed or variable, Principal and interest or maybe interest only), that means repayments can also be chosen to suit each parties requirements.
Another plus is that you are not deemed joint borrowers for the whole loan amount meaning if the other party defaulted on their loan this would not be listed a default by you.
It also means if you wanted to borrow funds for something else like a car or investment property just your share of the total loan would be considered when checking your affordability.
Disadvantages – By agreeing to a ‘property share’ loan you are essentially going to ‘guarantee’ the other parties’ loan, which means if for some reason they defaulted ultimately the lender can still force a sale of the property to recoup their loan. After all they can’t sell half a house. So, while you are not legally responsible for the other party’s loan in a practical sense you would have an interest in ensuring the other party maintained their loan and didn’t default on their obligations if you wanted to stay in the house!
Just remember that you will also still need to pass general servicing and deposit requirements. Plus have funds for other fees if applicable like LMI (Lenders Mortgage Insurance), stamp duty and legal costs.
For this type of loan, you should also have a formal agreement written and checked over by a legal adviser with all terms laid out including what happens in the case of loan default, sickness, ownership change, maintenance, selling, renovating, insurance etc. Just so that all parties are on the same page with anything that may arise.
The alternative to a ‘property share’ loan would be to buy jointly with family members and all have a joint loan. In this scenario all people on the title of the property would need to be on the loan and all be liable for the entire amount. All borrowers need to receive a benefit from the loan therefore all borrowers must also be owners. The minimum ownership percentage of the property for each borrower is generally 20%. You can’t have 1 owner (a parent for example) with a 1% share of the property who is also a joint borrower. This would be deemed “a borrower of convenience” just to assist the other owners qualify for the loan required.
When choosing your co-borrower make sure they have solid financial history, long term, or dependable employment, that they aren’t prone to risky spending or gambling etc.
Advantages - If you are borrowing jointly with one or more parties then you will have a higher approval rate as your incomes will be combined, more lending options available and more borrowing power. It also spreads out the burden of saving for your deposit and helps your repayments be more affordable overall. Also remember if you’re both first home buyers to check your eligibility with the government grants/schemes (ie. FHOG) currently available, depending what state you are in you may be able to receive a one-off payment.
Disadvantages - As you will be listed as co-borrowers on this type of loan, all parties will be jointly liable for paying back the loan, any interest charged and any defaults that may arise. So as per the ‘property share’ make sure you have a legally advised contingency plan in place in case anything arises untoward. Approval overall may be a little slower as there is more personal information to look into and if you decide to borrow again in the future your borrowing capacity may be reduced because of this joint venture.
So, if either of these scenario’s appeal to you and your keen to speak to an expert to go over all the finer details and see how these types of loans can benefit you, give our team a call and we will get you started. We will be able to find the perfect lender and home loan product for your individual circumstances.