In today’s market, it can be difficult to get a foot on the property ladder. Buying with a family member or friend can seem like a perfect solution, and we have seen an increase in joint mortgages and even parents helping their children to buy over the last decade.
But is it a good idea? The answer isn’t straightforward, and it really depends on your circumstances and goals. In theory, it can be an excellent way to make use of limited resources and get started on your property journey, but there can also be many pitfalls, both financial and emotional, along the way.
Whether you are buying in a co-ownership arrangement with a family member or friend or supporting a child with their purchase, it is critical that you are all on the same page before you start to look at property.
Evaluate financial risks
In the very early stages, you should have an honest discussion about the financial history and current position of each buyer. Whether you are a co-owner or guarantor, you need to fully understand this so you can evaluate the financial risks. Do this early, and it will be easier to unwind the arrangement if it’s not financially viable.
If you are supporting someone else with their purchase, it’s important to remember why you are doing it. We often see parents with the best intentions who inadvertently get themselves and/or their children into financial difficulty. If it looks like your child might struggle to meet their financial obligations, you could very well be helping them more by not helping.
It may also be worth considering gifting a lump sum or helping with repayments, rather than formal guarantor or co-ownership arrangements that can open you up to more risk. This way, you are still helping, but the bank will evaluate your loved one’s ability to repay the mortgage independently, reducing the likelihood of financial strain.
Be clear on goals
It’s also important to discuss your goals with the other party. Talk about why you are buying, how long you want to live in the property, and the lifestyle you want to maintain while living there. If these things don’t closely match, you should come to a compromise now or be prepared to walk away.
Discuss roles and responsibilities
With property ownership comes a raft of new responsibilities, from property maintenance to administration, such as payment of insurances or strata meeting attendance. Talking about these responsibilities and how you see them working from a practical standpoint, such as what will be outsourced and who will do what, can alleviate disagreements later.
Have an exit strategy and contingency plans
You should also develop an agreed strategy for when and how you will leave the arrangement. Will you sell? Will one buy the other out? When will this happen?
Deciding on a fixed plan is the easy part because there is also a range of scenarios that can (and some most likely will!) arise during your co-ownership arrangement. For example, what happens if you or your property partner enter a romantic relationship and want to change the living arrangements? Or if one party enters financial difficulty? Or if the relationship becomes strained and it’s no longer viable to live together? Or if the market is starting to fall and one person wants to sell?
Develop detailed strategies for exiting when one party wants to leave. For example, you might have a clause that allows one party to buy out the other and stipulates how the value will be determined or one that requires both parties to sell and stipulates how the costs of sale will be split.
For parents who are going guarantor for their child and their child’s spouse, it is critical to understand what will happen in the event of a relationship breakdown. You don’t want to get into a situation where you are financially responsible for a person who is no longer in your life.
Seek professional advice
Before you formalise any arrangements, seek financial and legal advice. It can be an emotionally charged time and getting impartial, expert advice can help you see the situation clearly. In fact, Australian banks recently recognised this, implementing an industry-wide policy requiring a 3-day cooling-off period for loan guarantors, unless they can provide proof of independent legal advice.
While you might incur an upfront cost for advice, it will pay for itself over time, ensuring you are protecting yourself and making the best decisions now and in the longer-term.
Once you had discussions with your property partner/s and sought your own advice, it is critical that agreements are formalised by a legal professional. While this can feel awkward, particularly if the agreement is with a close family member, it is important that you protect yourselves and have something to turn to in the event of an unexpected incident or disagreement.
At the end of the day, when you are buying with family or friends, it’s not just a financial relationship, it’s an emotional one. Discussing the arrangement in detail and formalising agreements will likely lessen the financial implications, but you may not be able to reverse the emotional ones if things go wrong.
My best advice is to enter into any arrangement with caution, clarity, and expert advice that takes into account your situation and your goals.
General Advice Disclaimer
The information in this blog is provided by Apt Wealth Partners (AFSL 436121 ABN 49 159 583 847) and is of a general nature only. It may not be relevant to your personal needs, objectives or financial circumstances. The circumstances of each investor are different and you should seek advice from a financial planner who can consider if the strategies and products are right for you.