With house prices at record heights and not everyone having access to help from the Bank of Mum and Dad, many Kiwis are asking whether it is worth buying with friends instead of on their own.
In the article below, we look at the pros and cons of purchasing a house with friends, what is involved with getting a mortgage together and the questions you will need to discuss long before you start searching for a home. As you’ll soon see, it is worth weighing up your options carefully before proceeding with this strategy.
Before we get started, however, there are some terms that you’ll need to know about:
Joint Tenancy is the usual method of ownership for couples. Neither party has a divided stake in the property; ie; the house is jointly owned by the couple. The house does not automatically become part of a party’s estate meaning if one party passes away, the other party takes ownership of the whole property.
Tenants in common have a distinct share in the property, for example, 20% by Person A, 50% by Person B and 30% by Person C.
Tenants in common is a more common approach for a group of friends who may have introduced unequal money into the purchase of a property. It is worth knowing that owners can transfer or mortgage their share of the house without the other owners’ agreement and if a party passes away, their share will be part of their estate.
The main benefit of purchasing a home with friends is that people who would otherwise have been unable to buy their own home can get onto the property ladder sooner. House prices in a hot market can increase quickly – more quickly than some people can save for a deposit. Buying a home with friends means getting these capital gains rather than trying to chase them with your savings.
Additional benefits include:
There are, of course, some downsides to buying a home as a group. These include:
We hear a lot “yes, but my friends have good jobs and are good with their money”. It’s worth remembering that not all mortgage defaults are intentional. A person may lose their job because of an employer’s failure and simply struggle to find new work because unemployment is high. Regardless of the reason, you will be on the hook for all mortgage payments until that person can start making paying their way again.
Understand that at most banks, you are liable for, and therefore need to be able to service the whole mortgage. This policy changes occasionally and at the time of writing, there is one bank that will definitely look at friends being able to only pay for their own portion of the mortgage (tenants in commons relationship) and one bank that will consider it if the application is otherwise strong.
From the bank’s point of view, there is an elevated risk of loaning to groups of friends. For example, arguments can occur or new relationships can form meaning unexpected exits of the agreement. All of these things can, of course, happen within couples but are less likely and more structured with their end. It’s horrible to say but a divorce is more orderly (from a legal perspective anyway) than friends wanting to go and buy with their new partner.
To really give the bank a strong application, you’ll want to show them at least the following things:
Peter, Paul, and Mary are all long-term friends and want to buy a house together. They have a 20% deposit between them. Peter and Paul are going to live in the property but Mary is about to get married and doesn’t want to live in the house; she just wants to help with the purchase. They have chosen Bank A because that bank will only assess the portion of the mortgage that each person is responsible for (Tenancy in Common). They have chosen to own a third of the property each.
In the example above, Mary wasn’t going to live in the property but wanted to help her friends purchase a home. Let’s say Mary could loan her friends $100k to reduce their loan. Is this feasible?
Before we dig into what the banks would think, it’s important to say that both parties would definitely want to talk to a lawyer about this.
Here are some discussion points when loaning friends money for their mortgage:
Banks in general require a deposit to come from someone who the creditors have “natural love and affection” for. In plain speak, this usually means family. Banks do not like home buyers to simply do a whip-around of their friends to boost their deposit.
However, if Peter and Paul could get a mortgage, Mary could then introduce funds into the mortgage to reduce the overall lending. As an example of this, Mary may be able to get 1% for her savings but Peter and Paul are paying 5% on their mortgage. If Peter and Paul could pay Mary 3% for her money, both parties would be better off. This would need to occur after the mortgage has been put in place though and couldn’t be part of the mortgage application.
Ownership involves some difficult conversations very early. Here are some topics to think about when starting down the journey of buying with friends.
Buying a house with friends will be a good strategy for a few people. Our recommendation is that you consider all the risks carefully and don’t skimp on the setup of the arrangement (for example, the co-ownership agreement). A couple of thousand dollars now will save you a lot more in the long run when the unexpected happens.
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