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Housing affordability is top of mind for many young Australians who are not yet in the property market, and right now, with property prices ‘cooling’ across the major cities, many property experts are encouraging first home buyers to take advantage while property prices are more negotiable.
As a result, we’re seeing a number of creative strategies being used by first home buyers. Rent-vesting is one such idea. This is when you buy a property but rent it out, and remain living in a share house or at home with Mum and Dad to keep your own living costs down.
Another is getting some financial assistance from the ‘Bank of Mum and Dad’, either giving them an equity stake in the property, or simply paying them back over time.
Another very popular plan is to buy property with siblings or friends. But is it a good idea?
“Well, yes and no,” says Julie Nipperess, of Step Up Financial Group, based in Orange, NSW.
“Home ownership is part of our Australian culture. It’s something that most people aspire to, and property is pretty much always a good long-term investment, so if buying with others is the only way you can purchase, then of course, it’s an idea worth exploring, but there are a few considerations,” she says.
While co-buying with a partner, friends or family might mean you don’t need to save as much for a deposit, or that you can increase your buying power or lower your mortgage repayments, there are also some things to be wary of.
If you’re planning on taking advantage of any of the New South Wales Government’s first home owner grants and concessions, then you need to check in with the rules.
“If you’re buying with someone who already owns a property, depending on how your mortgage is structured, and whether or not you intend to live in the property, you might not be eligible for what the NSW Government has on offer,” says Julie.
“Plan ahead,” advises Julie. “While it’s exciting and everybody goes into the scenario with the best of intentions, there are a hundred different reasons why it might not pan out the way you originally planned.
One co-buyer might need to get their money out sooner than expected, or one party may want to live in the property, or someone might want to use their equity against another mortgage. All of these can have serious implications, and none of them are quite predictable.”
“The solution is to work through all the potential issues and plan what is called your ‘exit strategies’ before you actually commit,” says Julie.
“I always say, ‘Think the best, but plan for the worst.’ And get everything documented legally so you each understand your rights, your commitments and the processes you’ve put in place to deal with any kind of eventuality. Some people think this is a bit heavy-handed but believe me, if something unforeseeable happens, you’ll be glad it’s all in a legally binding contract. And don’t forget insurance.”
Julie says it’s also important to be aware of the costs involved if something changes with the original arrangement. Needing to buy out a co-buyer or put the property on the market and release everyone’s finances not only involves real estate agency fees and legal fees at the time of sale, but there could be stamp duty implications or capital gains tax implications, too. And this can be costly if you haven’t actually had time to realise any capital growth in the property.
At the outset, everyone should be crystal clear. If people are contributing different sized deposits, the value of each personal ‘share’ needs to be worked out accordingly. You need to understand the number of years you’re committing to and understand how costs are going to be split, and profits too, as well as the structure of the finances and the potential tax implications.
“Many people make co-buying arrangements work very successfully over the long term,” says Julie. “But when you’re making any big financial commitment, it pays not to rush. Do your homework and always get professional advice.
Friendships and family relationships are fundamental in life; they’re precious beyond compare, but it’s important, too, to protect your own financial interests, no matter how much love and trust are involved.”
The information contained in this article has been prepared without taking into account your individual objectives, financial situation or particular needs – it is GENERAL ADVICE ONLY. Before acting on any information in this article, I recommend that you consider whether it is appropriate for your individual circumstances.