While house prices have eased, getting the deposit together for a first home is still a big ask. 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:
What is Joint Tenancy?
Joint tenancy is a form of co-ownership where two or more individuals share equal ownership of a property. Each joint tenant has an undivided interest in the property, and their ownership rights are identical. This type of ownership is characterized by the right of survivorship, which means that if one joint tenant passes away, their share automatically passes to the surviving joint tenant(s), rather than being distributed according to their will or intestacy rules.
Benefits of Joint Tenancy:
Simplicity: Joint tenancy is relatively straightforward to set up and manage, as all co-owners share equal rights and responsibilities.
Right of Survivorship: In the event of a joint tenant’s death, their share of the property automatically passes to the surviving joint tenant(s), avoiding the need for probate and simplifying the inheritance process.
Flexibility: Joint tenancy allows co-owners to pool resources, making it easier to afford a property or obtain a mortgage.
Shared Responsibilities: Joint tenants share the burden of property ownership, including mortgage repayments, maintenance, and property taxes.
Challenges of Joint Tenancy:
Lack of Individual Control: As joint tenants have equal rights and responsibilities, decision-making requires the agreement of all parties, which may lead to conflicts.
Credit Implications: Each joint tenant’s credit history can impact the other co-owners, potentially making it more difficult to secure a mortgage or refinance the property.
Inflexibility in Inheritance: The right of survivorship may not align with an individual’s estate planning goals, as their share of the property cannot be passed on to their heirs or beneficiaries through their will.
What is Tenants in Common? (also called Tenancy in Common)
Tenancy in Common is a form of property co-ownership in which two or more individuals own distinct shares of a property. Unlike joint tenancy, the shares owned by tenants in common do not have to be equal, and there is no right of survivorship. Upon the death of a tenant in common, their share of the property is distributed according to their will or intestacy rules, rather than passing automatically to the surviving co-owners.
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.
Pros of Tenancy in Common:
Flexibility in Ownership: Tenancy in common allows co-owners to hold unequal shares in a property, offering flexibility in terms of financial contributions and ownership stakes.
Estate Planning: As there is no right of survivorship, tenants in common can pass their share of the property to their chosen beneficiaries through their will, providing greater control over inheritance.
Shared Costs and Responsibilities: Co-owning a property as tenants in common enables the sharing of property-related expenses and responsibilities, such as mortgage repayments, maintenance, and property taxes.
Investment Opportunities: Tenancy in common can be an attractive option for property investors, allowing for pooled resources and shared risk in acquiring investment properties.
Cons of Tenancy in Common:
Potential for Conflict: Co-owning a property can lead to disagreements and conflicts among tenants in common, particularly when it comes to decision-making, property maintenance, and financial responsibilities.
Complexity in Management: Tenancy in common can be more complex to manage than other forms of co-ownership, as it requires the establishment of a comprehensive co-ownership agreement and potentially separate mortgages for each co-owner.
Selling the Property: The sale of a property held as tenants in common may be more complicated, as all co-owners must agree on the sale terms, and each owner’s share must be appropriately allocated in the proceeds.
What are the benefits of purchasing a home with friends?
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:
Affordability: Pooling resources with friends can make it easier to afford a home, as the combined financial strength allows for a larger deposit and the ability to qualify for a better mortgage rate.
Shared expenses: The cost of owning a home extends beyond the purchase price. By sharing expenses such as mortgage repayments, property taxes, insurance, and maintenance, the financial burden on each individual is significantly reduced.
Investment opportunity: Purchasing a home with friends can be a profitable long-term investment if the property’s value increases over time. This can lead to potential gains when it’s time to sell or refinance.
Social benefits: Living with friends can provide a sense of community and support, leading to a more enjoyable living experience.
What are the downsides of buying with friends?
There are, of course, some downsides to buying a home as a group. These include:
Relationship strain: Co-owning a property can put stress on friendships, as disagreements may arise over financial decisions, maintenance responsibilities, and other aspects of property ownership.
Exit strategy: When one friend wants to sell their share of the property or move out, it can create complications in finding a suitable buyer or replacement co-owner.
Legal complexities: Co-owning a property requires a legally binding agreement outlining the rights and responsibilities of each party. This can be a complex and time-consuming process.
Mortgage complications: Obtaining a joint mortgage may be more difficult than obtaining an individual mortgage, as lenders will assess the combined creditworthiness of all applicants
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.
How does it work getting a mortgage with friends?
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:
a formal co-ownership agreement showing all eventualities
at least 20% deposit
good income from the majority of the parties (don’t just have one friend who has savings but minimum income)
An example of friends borrowing together
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.
Some potential hurdles from this example
As Mary doesn’t plan to live in the property, she is effectively purchasing this property as an investment which may affect the Loan to Value Ratio that the bank can lend. Peter and Paul would need to check that the bank is still happy to lend up to 80% when (at the time of writing) the maximum a bank can lend to on an investment property is 60%.
Although each party is only paying for their third of the mortgage, if, say, Mary, later approaches Bank B for another loan on another property, that bank will assess her as though she is liable for the whole mortgage. In other words, Mary has lost a lot of buying power and only gained a third of the capital gains. Given that Mary is about to be married, the odds of her seeking to purchase a family home soon are higher than normal.
if Mary can afford the whole mortgage for the “friend’s house” and her new matrimonial house, why is she involved in this transaction? She is only getting one-third of the capital gains when she could afford a whole investment property herself. It’s nice to help friends but she is giving away – potentially – hundreds of thousands of dollars of capital gains
if Mary can’t afford both mortgages then she needs to understand that buying a house with her friends is stopping her from buying a matrimonial house in the future and needs to decide if this is correct for her
Can a friend simply loan money to their friends in return for a stake in the property?
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:
What interest or return are they expecting? Do they want ownership of the property or just a return on their loan?
Do they understand that the money may not be retrieved easily? A top-up loan would need to be done to pay back the loan and that may not always be possible.
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.
Questions to ask if you are buying a home with friends:
Ownership involves some difficult conversations very early. Here are some topics to think about when starting down the journey of buying with friends.
How do you deal with a friend exiting as an owner?
How do we value our property if one of us wants to exit?
Who will pay for the exit fees if someone wants to exit? Solicitor costs? Valuation costs? Etc.
What area do we want to buy in? Are there suburbs that are no-goes?
What features must we have in the house?
What if repairs are needed? Who needs to sign off on these? What if one party can’t pay?
What if one party feels the need to do some small repairs because they will be more expensive if left to deteriorate but another party doesn’t want to pay for the repairs?
Can we build a buffer so if one of us loses our job or has an unexpected expense, we can cover our expenses?
What are the rules around getting flatmates into the room we might have been occupying?
What are the rules around partners moving in?
What will we do if we sell and house prices drop?
Is everyone ok with pets?
Could Life and Trauma insurance cover any risks if one of us passes away or has a serious health issue?
If the ownership of the property will be tenants in common, does everyone have an up-to-date will?
Steps to Ensure a Successful Co-ownership Experience:
Open communication: Establish clear and open communication channels to discuss expectations, responsibilities, and potential issues that may arise during the co-ownership process.
Create a co-ownership agreement: A legally binding agreement should outline the rights and responsibilities of each party, including the division of ownership, mortgage repayments, property management, and exit strategies.
Seek professional advice: Consult with a mortgage broker, financial planner, and a real estate attorney to ensure that all parties understand the legal and financial implications of co-owning a property.
Establish an exit strategy: Plan for the future by discussing how to handle situations where one co-owner wants to sell their share or move out. This may include buyout clauses or the process of finding a suitable replacement co-owner.
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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