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BUYING A PROPERTY WITH FRIENDS
If you’re looking for a creative way to overcome being locked out of the property market by rising prices, buying a house with a group of friends may be a solution. It can also be a minefield though, so here’s how to avoid a blast.
While the excitement of banding together in such a life-changing moment can put everyone on a bit of a high, you need to plan for situations in which things might go wrong.
It’s essential you have all been completely upfront from the start about what you want to achieve by purchasing property together, as well as your personal expectations about timelines for purchasing the property, paying it off and selling it. And all of this must be documented in a co-ownership agreement.
Your finance broker can refer you to a solicitor of conveyancer with experience in working on co-ownership agreements, who can advise and create yours and make sure it is suitable, providing the necessary legal protection for everyone involved.
The big question will be what structure your ownership takes. There are two options: joint tenants and tenants in common. Joint tenancy is the most common ownership structure in Australia, as it is how most family homes would be owned.
However, because friends are less likely to share assets and long-term debts than a couple, and less likely to will their assets to each other, the ‘tenants in common’ model would usually be more suitable for this situation.
Under this model, each person owns a specified share of the property’s value. These shares may be equal, but needn’t be. So, if you are willing to contribute $500,000 to the price of a property, but your two friends are not quite at that stage and only comfortable contributing $250,000 each, you could own a 50% stake while they each own a 25% stake. Keep in mind, each stake is in the property’s value, not control of the property. Legally, under this model, each owner has the right to full access to the entire property.
The co-ownership agreement created in collaboration with your conveyancer should set out how the costs of maintenance and insurances are divided, as well as how sale proceeds will be divided.
It should also cover plans for depreciation and capital gains tax, selling a share of the property to another co-owner, choosing tenants or determining rent, selling a share of the property to a third party (otherwise there are no restrictions on this under the tenants in common model), and selling the property altogether.
If all purchasers are planning to occupy the property, the agreement should make plans for if one wants to move out but continue their ownership. Under the tenants in common co-ownership structure, the other owners occupying the property would not be obligated to pay rent to the one who has moved out, as long as they are not restricting that co-owner’s access to the property.
As is the case with any property purchase with any structure, each co-owner should have an up-to-date will that specifies who inherits their stake in the property.
There are many more considerations when buying property jointly, so speak to an expert early on to make sure you’re doing it the right way. ... See MoreSee Less
11 months ago ·
*Is a family guarantee right for you?*
Entering the property market is no easy feat for a first homebuyer, but even parents who aren’t prepared to hand over cash for a deposit may help by being a guarantor on a loan. Before taking the plunge however, it’s crucial to be aware of the implications involved. Here are three questions to ask yourself to see if a family guarantee is right for you:
*1. Am I financially fit to be a guarantor?*
The very first thing you should be certain of is whether or not you are in a financially capable position to pay off the loan if the borrower finds that they can no longer do so. There can be many disruptions to an income, such as loss of employment or a serious accident, and some types of guarantor loans hold the guarantor legally accountable to ensure the mortgage is paid off.
“You need to be in a strong financial position and have enough equity in your property to be a guarantor,” says a finance broker. “Some banks even want to make sure that the guarantor can service the full debt as well, so it’s always advisable to get independent legal or financial advice if you’re considering it.”
*2. Do the benefits outweigh the risks?*
It’s no secret that it can take a long time to save for a deposit and by becoming a guarantor, you offer the borrower the chance to enter the property market sooner.
“Lenders may treat the loan like an 80 per cent lend, so you avoid the costly lender’s mortgage insurance (LMI),” the broker advises. “You also don’t have to save up for a full deposit for the purchase, or sometimes any deposit at all.”
However, any time you borrow money or a bank places a mortgage over your property, there are definitely things that need to be taken into account, the broker explains. “While in some instances I would recommend it, it’s definitely not a first option as there are certain factors that can put you or your property at risk. Your ability to borrow will also be reduced after using a guarantor.”
*3. Are there other ways I can help without being a guarantor?*
If contributing to a deposit is an option, it allows you a little help without needing to put yourself or your property at risk, but there are some extra hoops to jump through if a deposit includes gifted funds.
“With gifted funds, if [the deposit is] less than 20 per cent of the property’s purchase price, then the banks will most likely want to see five per cent of genuine savings,” the broker explains. “Having said that, there are a few lenders that will allow you to use rent as genuine savings. So, if you’ve been renting for a while, it shows that you have the propensity to make repayments and then the reduced (less than 20 per cent) deposit may be used in that regard.”
MFAA accredited finance brokers can provide access to tailored loan products and expert knowledge, and meet the highest educational and ethical standards ... See MoreSee Less
11 months ago ·
EXPLAINER: HOW LENDERS WORK OUT WHETHER YOU CAN AFFORD A LOAN.
Different lenders use different formulas to work out how much you can borrow, but the biggest loan isn’t always the best idea.
Being able to secure your ideal loan amount can seem like a battle of balances. Once you’ve worked your budget and finances through a spreadsheet, there’s still the one issue left to deal with: assessment rates. This is also known as an ‘interest rate buffer’.
Getting in while the going’s good and securing your loan while interest rates are low doesn’t change the fact that lenders are compelled to ensure that you will be able to make repayments if interest rates fluctuate.
Matching the features of a loan to your financial position is important, and often requires a third-party expert to help guide you through.
“What is very important is that people understand the ramifications of exposing themselves to debt,” says the finance broker.
“When modelling costs, an adviser would be wise to be very conservative in the figures they are using.”
Assessment rates add a margin to the variable or fixed interest rate of your loan. The assessment rate provides added protection that you will be able to repay your loan when interest rates rise, because they are sure to rise and fall throughout the life of your loan.
“APRA is clamping down on lenders exposing people to too much debt and not preparing them for interest rates as well as they could have,” the broker says.
The assessment rate can be anything from 1.5-2% above the variable rate, depending on the lender, and many are currently using rates of approximately 7-8%. Mortgage assessment rates vary from lender to lender, which is why different lenders may offer people in the same financial situation different loan amounts.
In some cases, the difference in loan amounts offered by different lenders can go into tens of thousands of dollars, but the biggest loan isn’t always the most suitable. Ensuring that you can pay your loan, whether rates stay low or rise, requires a bit of know-how. Speak to All Together Finance ... See MoreSee Less
11 months ago ·