Want to enter the property market via co-buying? Here’s a practical guide

Want to enter the property market via co-buying? Here’s a practical guide

In the face of rising property prices, the idea of teaming up with a sibling or close friend (co-buying) to enter the real estate market has become increasingly appealing. For many, the trust and camaraderie shared with a close mate can seem like the perfect foundation for such a significant financial commitment. Research from ING indicates that nearly half of Australians would consider buying property with a friend. Furthermore, 46% believe that rising house prices will make such arrangements more common in the coming decade.

Banking and finance experts have observed that we are breaking new ground in regards to the generational shift and how to get into the property market. The Great Australian Dream of buying a home is not over, despite the fears of many who feel priced out of the property market.

However, purchasing property is far more complex than splitting the bill at the pub. It involves substantial financial and legal commitments that can potentially strain relationships if not handled with care. Let’s explore the pros and cons of buying a house with a friend or family member and determine the critical considerations involved.

The Benefits of Buying with Friends or Family

1. Entering the Market Sooner

Buying property with a trusted friend or family member can significantly expedite your entry into the real estate market. Not everyone has a partner or spouse to co-purchase with, and combining resources can help reach the necessary deposit faster. According to a recent survey, half of Gen Zs would consider buying alongside a friend, followed by 35% of Millennials and 28% of Gen Xers. This trend reflects a growing willingness among younger generations to explore alternative pathways to homeownership.

2. Increased Borrowing Power

Pooling finances with another person can also enhance your borrowing capacity. By combining incomes, you may qualify for a larger loan, allowing you to purchase a more desirable property than you could afford on your own.

3. Shared Responsibilities

Co-owning a home means sharing the responsibilities of home maintenance, such as cooking, cleaning, and yard work. This can make homeownership more manageable and enjoyable.

4. Access to First Home Buyer Benefits

Certain first home buyer benefits, such as the Home Guarantee Scheme, have been updated to include buyers purchasing with friends or siblings, expanding the accessibility of these incentives.

The Drawbacks and Challenges

While co-buying offers several benefits, it also presents significant challenges that should not be overlooked.

1. Financial and Relationship Risks

The primary concern with co-buying property is the potential impact on your relationship. Financial situations and personal circumstances can change rapidly. Lending experts highlight the importance of discussing long-term plans and potential scenarios upfront. For example, what happens if one person wants to move overseas or live in the property with a partner? Clear communication and planning are essential to address these “what-if” situations.

2. Legal and Financial Obligations

Both parties must fully understand their financial and legal obligations. If one co-owner fails to meet their mortgage repayments, the other may be held responsible. Transparency and formal agreements at the outset can help mitigate these risks. Consulting with a trusted financial advisor or experienced mortgage broker before making such a commitment is the smart choice for those considering co-buying a home.

3. Potential for Disputes

Conflicts can arise over various issues, from financial contributions to property use and maintenance. Establishing a comprehensive legal agreement that details each party’s responsibilities and rights can help prevent disputes. This agreement should cover aspects such as:

• Financial contributions and payment responsibilities
• Exit strategies if one party wants to sell their share
• Usage and occupancy rights
• Decision-making processes for maintenance and repairs
• Dispute resolution mechanisms

Ownership Structures: Joint Tenancy vs. Tenants in Common

When co-buying property, choosing the right ownership structure is crucial. There are two primary options: joint tenancy and tenants in common.

1. Joint Tenancy

In a joint tenancy, all owners hold equal shares of the property. If one owner passes away, their share automatically transfers to the surviving owners. This structure is often chosen by couples but may not be suitable if co-owners want unequal ownership stakes or have different inheritance preferences.

2. Tenants in Common

This structure allows each owner to hold a distinct portion of the property. Each owner can sell their share independently, providing more flexibility. However, it requires a well-defined exit strategy and clear agreements on living arrangements and the right of first refusal if an owner decides to sell their stake.

Getting a Home Loan with Friends or Family

Applying for a home loan with friends or family works similarly to applying with a partner or as an individual. All applicants must meet standard requirements, including:

• A solid credit history
• A sufficient deposit and borrowing power
• Stable income and employment
• A history of genuine savings and a savings buffer
• No excessive debts

An alternative to traditional joint home loans is the property share loan. This type of loan, offered by some lenders like CommBank, allows each co-owner to take out a separate loan for their share of the property. For example, if two friends buy a house worth $500,000, each can secure a $250,000 loan, with each being responsible for their own mortgage.

Co-buying property with a friend or family member can be a practical solution to overcome financial barriers and enter the property market sooner. However, don’t jump too quickly into a decision, make sure you take careful consideration, have clear communication, and formal agreements to navigate any potential challenges.

By understanding the major benefits and risks, choosing the appropriate ownership structure, and securing the right financial arrangements, co-buying can be a rewarding pathway to homeownership. It’s important to remember to seek professional advice to ensure all legal and financial aspects are thoroughly addressed before making such a significant commitment.

For prospective homebuyers who are looking to join forces and get their foot into the property market, get in touch with our experienced home loan strategists at Rateseeker who can help guide you through the in’s and out’s of the complex lending landscape. We’ve helped countless Aussies open doors to their new homes, we’d love to help you take the next step and ensure you’re getting the sharpest rates and advice available!