With property prices on the rise, pooling funds with a close friend to buy a home can seem like a great idea.
After all, it means you can enter the market sooner than you’d otherwise be able to on your own while getting to live with your bestie. That’s a win-win in anyone’s book, right?
However, as with most things in life, co-ownership comes with both pros and cons attached. So before you start househunting with your friend, there are a few things you should consider first.
The pros of co-ownership
Entering the market faster
Depending on where you live, it can take over seven years to save a 20% deposit for an entry-priced home, according to Domain’s 2021 First-Home Buyer report. That’s a long time to be cutting back on life’s little luxuries and living on a budget.
But buy with one or two friends and you can potentially cut years off the timeline. For example, say you need to save $90,000. Split that with two other people, and you only need to personally come up with $30,000 – much more achievable.
Having more choice
Lenders will look at your combined assets, income and other financial commitments when assessing a joint home loan application. So pooling resources with friends can up your borrowing power – giving you more options when the property search starts.
Splitting the bills
Buying a property comes with several hidden costs aside from the purchase price, such as stamp duty, legal fees and home loan fees. The bills don’t stop when you own the property either. Council rates, insurance and utility bills can really add up. All these expenses can be split when you buy with a friend, minimising the impact on your cashflow.
The cons of co-ownership
Risk of disputes
You and your friend might be besties now … but relationships can break down, especially when you add the pressures of living together and money matters into the mix.
Being liable for the whole mortgage
When you take out a home loan for a joint property purchase, all co-owners are responsible for making payments on time and in full. So if your friend can’t keep up with their side of the bargain for whatever reason, the responsibility for the whole mortgage passes to you.
Potentially damaging your credit score
Even if you always make your share of the repayments, your credit score could be negatively affected if your co-owner defaults on theirs. This could make it harder to get approved for credit in the future.
Difficulty walking away
Life changes. So what works for you now might no longer in the future – whether it’s because of a serious relationship, relocation or it’s just time for pastures new. But what happens when one of the co-owners wants to sell and the other doesn’t? While you can force a sale, you may ruin the friendship in the process.
The different types of co-ownership
There are two main ways of buying a property with another person in Australia:
- Tenants in common: each party has a share in the property (which can be unequal) that can be transferred to whomever you like in your will
- Joint tenants: Both parties own the property together with no one having an individual ‘share’. If one party dies, the other inherits full ownership.
You’ll likely be advised to become tenants in common when you buy a property with a friend, rather than joint tenants. This is because it is typically easier to walk away from the deal should complications arise or it’s time to move on.
Put it in writing
Before buying a property with a friend, it can be a good idea to get legal advice and put everything in writing to avoid legal disputes. A co-ownership agreement sets out each party’s roles and obligations, and can prevent issues before they arise.