Have you ever thought about buying a property with your brother, sister, relative or a close friend but you weren’t sure how to do it?
You may already be renting with flatmates but making the decision to purchase a property together allows you to get into the property market sooner.
Good properties don’t wait around forever and the beauty of a co-ownership investment loan is that you can buy a property at a fraction of the cost.
How do I qualify?
You and your co-borrower won’t have to meet exceptionally difficult requirements in order to get approved:
- A sufficient deposit: For the home loan as a whole, you’ll need to have a deposit of at least 5% of the property value as genuine savings between you and your co-borrower. Some lenders will accept a no deposit option such as a gifted deposit to make up the amount required but third party guarantors are not accepted. Find out more.
- To be purchasing an acceptable property: Most lenders have restrictions relating to the type of property that you want to buy as well as its location. As long as you’re buying a standard property or unit in or near a metro/city location, you should be fine.
- A stable job: You and your co-borrower need to have stable employment with at least 3 to 6 months history in your respective jobs.
- A good income and asset position: Your income and asset position must reflect your current age and the number of years you’ve been working as well as be sufficient enough to meet standard serviceability requirements set by the bank. “Serviceability” means you’re capability in meet your mortgage repayments for the amount you’re borrowing.
- A good credit history: Although it will help your case if your credit file is clear of black marks like defaults, judgments, bankruptcies and a high number of credit enquiries, there are exceptions if you can build a strong case with the right lender. A mortgage broker can help you do this.
- A like-minded co-borrower: This isn’t a lending requirement per se but a co-ownership investment loan only works if you’re able to go into mortgage with someone you trust, with the character and capacity to make their mortgage repayments and someone who shares your investment goals, such as, when you would like to sell the property.
Give us a call on 1300 889 743 or complete our online enquiry form so one of our mortgage brokers can properly assess your situation and let you know if you qualify for a co-ownership investment loan.
How much can I borrow?
Like a standard investment loan, your borrowing power will be determined by the strength of your application. There are no specific limits on the Loan to Value Ratio (LVR) that you’re eligible for or the amount you can borrow to.
In saying that, your borrowing capacity will be equally determined by the strength of your co-borrower. If they fall short on some of the eligibility criteria, it will affect the amount you can borrow so it’s worth you and your co-borrower each getting a proper assessment from a qualified mortgage broker before applying for a shared equity loan.
As long as you and your co-borrower are in a good financial position, have a high income and stable employment, you can potentially borrow up to 90% to 95% of the property value with select lenders.
How does it work?
Co-ownership or property sharing is the same as applying for a mortgage your de facto partner or husband or wife.
The only difference is that because you’re buying the property with someone who falls out of that relationship scope and the financials are kept separate by having the loan between the two parties. Effectively, there are two loan facilities on the one property.
To explain, let’s say that Jeff and Betty are a couple and they currently rent with Jeff’s brother Tim.
The couple and Tim decide that they want to buy a property as an investment but they each want to manage their own financials, including the mortgage, separately.
Soon enough, they find the perfect property (valued at $600,000) but they’re not sure what to do next.
Well, in order to meet the minimum deposit required, the couple and Tim each put in $24,000, which meets the 5% genuine savings requirement as well as the other costs associated with buying a property including stamp duty, transfer of title fees, conveyancing costs and Lenders Mortgage Insurance (LMI), a one off fee charged when borrowing more than 80% of the property value.
The bank will assess the couple and Tim as being equally responsible for the investment loan so they will all have to meet the serviceability requirements of a 95% investment loan.
If the bank is satisfied, the couple and Tim will each have a loan for $276,000 ($600,000 minus the combined deposit of $48,000 and divided by 2).
Bare in mind that the mortgage “split” doesn’t have to be 50/50. Jeff and Betty may decide that with their combined income they can afford to put in $31,680 for the deposit (an extra $7,680), which is about two thirds of the total deposit required for the purchase.
Because of this, they would own a higher proportion of the share in the mortgage (and, therefore, the property) than Tim.
What this means is that Jeff and Betty would receive a higher proportion of the sale proceeds if and when they sell their share in the property (to another co-borrower) or if they decide to sell the property as a whole with Tim. The same goes for rental income generated from tenants: Jeff and Betty would receive a higher proportion of the rent.
Of course, all of this is negotiable!
With co-ownership investment loans, it’s essential that each party seeks out individual financial advice, including the services of a solicitor, who can draft up a co-borrower agreement so you’re on the same page in terms of ownership of the property, ongoing costs and your rights as a whole.
How is the loan set up?
Once the property share loan is approved by your bank, you can choose to set up you loan facility as you wish (based on your eligibility for particular home loan features), including choosing a professional or basic package, choosing to fix your interest rate or not or choosing to have a 100% offset account.
While each party can choose the payment schedule that fits their needs (fortnightly or monthly repayments), each loan facility must have the same loan period i.e. one of the loan facilities can’t be for 20 years and the other for 30 years.
In addition, there can only be a maximum of two loan facilities on the one property, although each facility can have multiple borrowers.
- Lower upfront costs: You can split the costs of purchasing the property including the deposit, legal fees, stamp duty, building reports, LMI and other fees.
- Ongoing costs: There are ongoing costs of owning property, whether it’s an investment or not. These costs include rates, repairs and renovations. With a co-borrower you can share these costs together.
- Pay off the mortgage faster: With each borrower focusing on paying off their share of the mortgage, the loan can be paid down a lot of faster than a typical investment loan. Just be sure to check that you won’t incur break costs for paying too much of your loan off in a short amount of time.
- Get the same interest rates as a standard borrower: You won’t pay a premium interest rate with a co-ownership investment loan. Your interest rate will be based on the amount you’re borrowing and the risk of all the borrowers involved in the application.
Call us on 1300 889 743 or complete our free assessment form today and we can let you know if you qualify.
Who can I borrow with?
You can borrow with anyone you feel you could commit to a mortgage with, including:
- Siblings or other relatives.
- Work colleagues.
- Two or more sets of couples (for a home, investment or even a holiday house).
Are there no deposit options available?
Yes! If you don’t have enough for a deposit there are no deposit solutions available including:
- Asking your parents to gift you the money for the deposit.
- Using a personal loan as a deposit.
- Using equity in an existing property.
- Using a self-managed superannuation fund.
Unfortunately, asking your parents to act as guarantor on your share of the mortgage will not be accepted because your co-borrower is already acting as guarantor for you, and vice versa.
If you’re in this situation, simply fill in our free assessment form and we will try to find a solution for you.
Can I still qualify for a first home owners grant?
Yes, you may be eligible for a First Home Owners Grant (FHOG) or your state’s equivalent but there are specific requirements, namely, you and your co-borrower must all be first home buyers.
That means you’re only eligible to receive the FHOG if you and the co-borrower are both first home buyers i.e. you won’t be eligible for if you’re a first home buyer but your co-owner isn’t.
In addition to this, eligible applicants will receive only one grant for the property.This is something you factor in before applying for this type of investment loan, particularly if you’re relying on the FHOG for financial reasons.
Do I need special insurance?
Although we can’t provide specific advice on insurance, what you may want to look into getting is mortgage protection insurance.
This insurance protects you from losing the property should you or one of your co-owners be unable to make mortgage repayments. This could be due to any number of reasons, including:
- Temporary or medium-term unemployment.
- Temporary or permanent injury or sickness that’s stopping either of you from working.
How do you own the property?
When married or de facto couples purchase a property, normally they will choose to own the property jointly and equally rather than holding proportionate shares. This is known as joint tenancy.
The problem with this type of ownership when it comes to a property share arrangement is that on the death of one of the joint tenants, the remaining tenant will inherit the remaining share, regardless of any will and testament that’s in place.
Tenants in common is a more practical arrangement because each party has a share in the property (which doesn’t need to be equal) and they can freely sell/transfer their share in life or upon death via a will.
This makes sense if you have children since you’d likely want your share going to your next of kin rather than the co-borrower.
The only exception to this is if there is a “co-ownership agreement” in place that stipulates particular restrictions.
This could range from not allowing either party to sell/transfer their share until a certain amount of time has elapsed or giving first rights to buy out the co-owner’s share should they decide to sell.
Get a co-ownership agreement
Co-ownership investment loans can quickly turn into a nightmare if you don’t have a co-ownership agreement in place prior to purchasing the property.
There are agreement templates you can download online at a fraction of the cost of a legal professional but we recommend you speak with a qualified solicitor.
They can sit down with you and the co-borrower to draft up a specific agreement that fits your needs and situation.
Generally, the agreement sets out clearly:
- What happens when one party wants to exit the arrangement: This could be the result of illness, losing a job, moving interstate or overseas, or as a result of default.
- An agreed time period for keeping the property: It’s essential that you and your co-borrower share similar plans for the property that suits each of your lifestyles and overall needs.
- A plan for maintenance costs: Generally speaking, if one co-owner spends money in carrying out general maintenance and/or repairs on the property without the consent of the other co-owner, that co-owner can’t force the others to contribute for those expenses. You may want to set up a so-called “sinking fund” to cover these costs, particularly for periods when the property is vacant.
- A mediation or dispute resolution clause: Basically, this should outline how disagreements are to be resolved between each party. Typically, the clause indemnifies each co-owner against the failure of the other co-borrower missing their mortgage repayments and, in a worst case scenario, defaulting on their share of the investment loan. Without a legal contract in place, you may be held liable for the entire mortgage in the event of the co-borrower defaulting. Although it’s not your fault, failure to prop up your co-borrower affects the credit files of all parties involved in the ownership of the property.
- The divvying up of ongoing costs: Splitting these costs should be based on each party’s share in the property. This includes the costs associated with selling the property if you make the decision to do so down the track.
Can I sell my share?
Yes! As long as you’ve set up the ownership of the property as tenants in common (and you adhere to the co-owner agreement), you can sell your share at any time and keep any profit you make from your share.
Keep in mind that standard break costs apply to your property share loan facility so be sure that you check the terms of your mortgage.
What if you want to sell but the co-borrower doesn’t?
Again, all of this should be detailed in the co-owner agreement prior to purchasing the property.
Typically, your co-owner will have first rights to buy your share should you want to sell.
If there isn’t an agreement in place, things can get a little messy, even ending up in the Supreme Court and costing you upwards of $20,000 to come to a resolution.
How it works is that the party opposing the sale must dissuade the court from ordering a sale.
What the court may look to do is determine whether the land can be easily divided up, baring in mind the costs of subdivision.
They will also take into account hardship on the minority if the greater benefit to the majority were to prevail.
How does investment income and tax work?
You may be wondering how the benefits of owning an investment property by yourself compare to a property share arrangement.
One of the first things you’ll have to work out is finding good tenants.
This can be left up to a real estate agent but if you decide not to go with an agent, you and your co-owner need to come to an agreement.
What about rental income?
Rental income will be split between both parties based on their respective share in the property but you’ll both need to come to a decision on what you will charge for rent.
Claiming negative gearing benefits, thankfully, is a little less complicated since each party will receive their tax statement separately with each statement detailing their share in the asset (the property).
You can simply work with your accountant to claim these benefits for your proportion in the property.
The other aspect to consider are the implications of selling the property. Firstly, how do you come to a decision on the selling price?
When you are able to come to a decision, bear in mind that Capital Gains Tax (CGT) will still apply since it’s an investment property.
Like negative gearing though, you will only be charged on your proportion of the sale proceeds.
It’s essential you speak to an account when it comes to the CGT and negative gearing considerations of owning an investment property.
Get financial advice
It’s essential that each party get separate, independent legal advice before applying for a co-ownership investment loan. This is especially true if you’re planning on buying a property with a friend or co-worker, although relationships with siblings and relatives can also breakdown.
What may be in the best interests of the co-borrower may not be in your best interests so really consider what you’re willing to commit to financially.
Get a will drawn up that clearly names the benefactor of your share in the property in the event of your death, for example. In addition, you and the co-borrower may want to consider whether they should give Power of Attorney to the other in case one party becomes incapacitated.
What else should I keep in mind?
- It helps to know your co-borrower: The person doesn’t have to be a relative or even a best friend but it should be someone with a good character who you trust to meet their financial commitments. Look for someone in a similar financial position as yourself. If the co-borrower has an unstable income, you may end up in a situation .where you’re propping up your partner’s mortgage repayments.
- Have similar goals in mind: Each party really needs to agree on what you want to get out of owning the property. Is it just for investment purposes or you would like to eventually live in the property?
- Set up the legal side with the worst-case scenario in mind: It sounds harsh but try not to let your emotions dictate your decisions. Relationships can change quickly but a home loan is a significant financial commitment that will stay with you for a long time.
Speak to a mortgage broker today
Buying a home with others may be a cheaper option but there is a lot more planning involved than buying a property by yourself and/or in a joint tenancy arrangement.
It’s essential you get independent legal advice in order to avoid many common traps that come with a co-ownership arrangement.
Call us on 1300 889 743 or complete our free assessment form so one of our mortgage brokers can properly assess your needs and tell you whether a co-ownership investment loan is right for you and what you’re looking to achieve.