What to Consider When Purchasing with a Mate

Purchasing a house with a mate

Let’s be real: It can be difficult to enter the property market. This may lead you to consider the option of purchasing with a friend, brother, sister, or uncle to share the responsibility. In some cases, this can be a great option – it can help you reach a higher price point and get you into the market sooner especially as a first home buyer.

Before diving in, there are some key considerations and plans on what to consider when purchasing with a mate.

Future Borrowing Capacity

If both parties only look to purchase one property, then this won’t be an issue. However, if either party would like to purchase another property in the future, this is how the banks will consider your borrowing power.

If you have a total loan of $500,000, common sense would suggest that person 1 has $250,000 of debt and person 2 has $250,000 of debt.

Yet in the eyes of most banks, this does not ring true. If you would like to purchase a second property in the future, by yourself or with your significant other, you will need to be able to service the full $500,000 debt, but you will only be able to use half of the rental income you receive from the property. This can have a big impact on your borrowing capacity.

In a situation where you have a single person making $80,000 p.a, this extra debt could reduce your borrowing capacity by more than $250,000.

There are a limited number of lenders that will only consider the ownership portion for any future borrowings, so you might be lucky enough to not face this issue.  However, it is vital to understand the potential roadblocks and ensure you have thought out your future property goals when looking to purchase with a mate.

Important to have a legal agreement in place when purchasing with a friend

When purchasing a property with a friend, it's essential to have a clear legal agreement in place. This agreement outlines the rights, responsibilities, and ownership percentages of each party, helping to avoid disputes and provide peace of mind.

Here are some key considerations when drafting a legal agreement:

1. Ownership: Determine the ownership percentages, whether equal or unequal, which will impact the distribution of mortgage and expenses.

2. Decision-making: Clarify who will make decisions regarding the property, such as renovation or sale.

3. Contributions: Specify the financial contributions of each party, including the mortgage and expenses.

4. Future sale: Establish a plan for the sale of the property in the event that one party wishes to sell in the future. This should include the procedure for selling the property and the distribution of profits.

5. Dispute resolution: Set out a clear process for resolving any disputes that may arise.

6. Termination: Determine the conditions under which the co-ownership arrangement can be terminated, such as death or the decision of one party to end the arrangement.

It's recommended to seek the advice of a legal professional when drafting a legal agreement to ensure it is legally binding and meets the needs of both parties. Having a clear and comprehensive legal agreement in place will provide security and peace of mind for all involved.

What are the tax implications to consider 

When purchasing a property with a mate, it's important to consider the tax implications of joint home ownership. This can help you plan and prepare for the future. Here are some key points to keep in mind:

1. Capital gains tax (CGT): In the event of a future sale, both partners may be responsible for paying CGT on their respective ownership percentages.

2. Negative gearing: If the property is rented out, partners may be eligible for negative gearing benefits that reduce taxable income.

3. Depreciation: Partners may be able to claim depreciation on the property, which can also reduce taxable income.

4. Land tax: Depending on the state, partners may be responsible for paying land tax on the property.

5. Stamp duty: When purchasing the property, partners will be responsible for paying stamp duty, which varies based on the purchase price and state.

6. Rental income: If the property is rented out, any rental income received will be taxable, and partners will be responsible for paying tax on their respective ownership percentages.

It's a good idea to consult with a tax professional to fully understand the tax implications of joint home ownership. This can help you make informed decisions and be prepared for any future tax obligations.

Life plans heading in different directions

As life goes on and lives head in different directions, you may find yourself in a situation where one party wants to sell and the other wants to hold on to the property.

This is worth creating a plan for considering the variety of situations you could find yourself in. Certain agreements may need to be vetted by a solicitor. For example;

• After 7 years, if either party decides they want to sell, they have the right to exercise that option.
  
  The reason I have gone with 7 years is that based on past property data, that is enough time to give you some capital growth where selling could still be a profitable outcome for both parties.

• The other party has first option to purchase the other portion of the property at the current market value
  
  This is simply a fair and equitable agreement when you are heading into a partnership with someone.

Overall, I have seen this situation be done very successfully & also seen and heard about stories of this not going so great.

As with all large financial decisions, the important part is to consider what we have discussed;

• Borrowing capacity could be reduced for future purchases.
• Have a frank discussion and have an agreement in place before purchasing with a mate.

Benefits of speaking with a mortgage broker when considering purchasing with a mate

A mortgage broker can help you understand the different mortgage options available to you and assist with the application process.

Here are some important considerations when speaking with a mortgage broker about joint home ownership:

1. Joint income: Ensure that both friends' incomes are considered when determining the mortgage amount.

2. Responsibility for mortgage repayments: Clarify who will be responsible for making mortgage repayments and ensure this is reflected in the mortgage agreement.

3. Ownership percentage: Discuss the ownership percentages and ensure that the mortgage agreement reflects this.

4. Loan term: Consider the loan term and ensure that it is suitable for both friends.

5. Repayment options: Consider the repayment options available, such as weekly, fortnightly, or monthly repayments, and choose the option that best suits both friends.

By speaking with a mortgage broker, you can ensure that you have a clear understanding of the mortgage options available to you and make an informed decision. Everyone’s situation will be different & if you would like to discuss this further please feel free to get in touch with an Inovayt mortgage broker for a no obligations chat.