How Mates Or Siblings Could Help You Finally Enter The Property Market
Buying property isn’t just for trust fund babies, couples or those who make smashed avo toast at their parent’s place. There is another way: co-ownership. Your siblings, friends or relatives could be the key to your property-owning dreams, but there are things you need to know before going down that avenue. We speak to co-owners and a financial expert to find out.
Fancy owning your own home one day? The great Australian dream is fast becoming a nightmare for many young people, locked out of the market due to housing affordability. The average home in Australia costs $650,000 and you need an income of roughly $100,000 a year to service that debt, but the average income for Australians under 30 years of age is just $40,000 a year. Even if you’re a couple, the maths just doesn’t work.
So how to get a grip on the property ladder? You can shrink your life or buy something off the shelf, but if you’re looking for a traditional bit of bricks and mortar, co-ownership might be the go. Pool your buying power with friends or relatives and The Great Australian Dream could be your reality.
More money, more muscle
Earlier this year, Matt Fry bought property in Sydney with his brother and his best mate. Matt and his co-owners have decent jobs – he is the regional manager of a tech start-up, his brother Ben is a lawyer and their friend Steve is a salesman in the medical imaging field – but their good jobs weren’t good enough when it came to Sydney house prices. “We didn’t want to buy an apartment, we really wanted to buy a house and the only way we could afford that in Sydney was by going in together,” the 29-year-old explains.
The boys recognised that the capital growth on a house would be much stronger than an apartment but they weren’t willing to move miles out of the city in order to buy a house. By pooling their funds, they managed to buy a three bedroom with a garage in Marrickville that had ample space for their surfboards.
“There are some great perks to owning a home with other people rather than taking out a home loan on your own,” says Chris Screen, Head of Home Ownership at Westpac. “Because there are more of you, the deposit is usually quicker to pull together and the combined amount can sometimes give you more of a choice when it comes to the size, style and location of the property you want… Other expenses that come with buying a house like stamp duty or legal fees, as well as ongoing maintenance and repair costs can also become cheaper as they’re split between the multiple owners.”
Co-owners are still co-dependent
“Because there are more of you, the deposit is usually quicker to pull together and the combined amount can sometimes give you more of a choice when it comes to the size, style and location of the property you want.”
When it came to saving a deposit, Leanne Mai’s brother came up a little short, whereas Leanne had been saving for a while but couldn’t find the right place. On their parent’s suggestion, they pooled their resources and bought a two-bedroom, two-bathroom apartment in Sydney off the plan, primarily as an investment property. “It was meant to be rented out but we wanted to get a place that we would be happy to live in at some point.”
Mai and her brother discovered that a number of factors affected how much they could borrow, including the fact that they were living and working in London when they applied for their mortgage. “Being a co-owner meant that not only did our varying income affect the amount we could borrow but also any other financial investments,” she says. “The amount we were able to borrow wasn’t as much as we originally anticipated.”
There are two ways about it
As Chris Screen explains, there are two main ways to share a home loan. The first is called a ‘joint tenancy’ where the home is co-owned on the condition that if one of you dies, the other takes full ownership.
The other way is called a ‘tenancy-in-common’, which is where each co-owner can leave their share of the home to anyone they choose in their will. This tends to be more common when there are a few owners involved.
“It’s important to remember that in the same way you would get a loan on your own, all owners will become jointly responsible for the full loan amount. So if one of your mates doesn’t make a repayment, it will be up to you to pay the amount that’s outstanding,” Chris says. “How’s that for mates’ rates!”
Always consider the worst-case scenario
Matt and his co-owners found it was easy to get a mortgage with three full-time salaries to repay it. In fact, they were offered almost double the amount of money than they ended up borrowing. Ultimately, they decided that being conservative was the most responsible path, particularly considering everything that could go wrong.
“If one of your mates doesn’t make a repayment, it will be up to you to pay the amount that’s outstanding… how’s that for mates’ rates!”
“We spent a lot of time going through the plan. We were all pretty sensible about it, made sure that none of us would be stretched financially,” he says. “We sat down and said ‘what’s the worst case scenario? If someone gets sick in a year’s time will we be able to repay the loan? What happens if someone wants out?’ We weren’t relying on the market to go up or for interest rates to stay low to make it a worthwhile investment.”
Leanne agrees that you need to think about co-ownership in terms of worst-case scenario. “You need to be transparent and agree on the purpose of the property. Think about all scenarios, what happens if someone wants to pull out or move in? Who are you buying with? What is their financial situation? Are they reliable?”
Chris at Westpac emphasises that the risks are very real. “While borrowing with one or more people can sometimes reduce your repayments, it’s important to know that the whole loan amount will still be held against your name.
For example, if you took out a $500,000 home loan with your brother or sister and agreed that you’d each be responsible for paying back $250,000 to the loan, your bank records would still show that you have a loan of $500,000. This could also impact your ability to take out additional loans – worth knowing if you were planning to purchase a second investment property, for example. So the catch-22 is while a shared ownership agreement can help you get a foot in the door of the property market, the loan could limit you in other areas.”
Get it in writing
To mitigate some of the risk, Matt and his co-owners drew up a private contract outlining each person’s rights and responsibilities when it came to their house. They agreed that they all had to live in the house for at least a year, then continue to service the mortgage for a second year, after which any of the partners could opt to sell their share to the other co-owners or request that the house be sold and the profits split. His advice to anyone considering co-ownership is simple: “Get a smart contract up front for peace of mind and be conservative.”
“Plenty of people told us it was a bad idea, that it was too risky, but to us it was exactly the opposite. For us, it was a good investment.”
Chris agrees that you can’t be too careful in this scenario. “Taking out a home loan is a big step for anyone and it’s vital to have a back-up plan in case things go pear shaped. It might seem unlikely now, but what would you do if you have a falling out with your sibling, friend, partner or anyone else you co-own a home with? This can happen, so it’s important to ensure you’re covered. Best thing to do is have a solicitor draw up a co-ownership agreement to safeguard your rights and protect you from potential issues, like if someone defaults on their repayments or decides they want to sell.”
“Ultimately communication and organisation is key,” says Leanne, who is happy with her arrangement.
For Matt, a little bit of risk is worth the reward. “We all don’t mind taking risks, we get along really well and get along with other people really well, so I think we have the right temperament,” he says. “Plenty of people told us it was a bad idea, that it was too risky, but to us it was exactly the opposite. For us, it was a good investment.”
For more information on all types of Westpac home loans, whether it’s your first property or an investment, click here.
Simone Ubaldi is a ghostwriter, music journalist, film critic and has co-authored four books, including memoirs of Bon Scott and Mark ‘Chopper’ Read. She stashes a lot of her writing here.