Q: I have been planning to buy an investment property this year as my first property purchase, but now most banks need me to have a bigger deposit! My friend’s in a similar position, so I’ve been thinking that maybe we could pool our money and buy together. Before I suggest it to my friend is there anything I should know about buying property with a friend that could be a problem?
A: Australia’s banking regulator, APRA, has made some changes to investment lending.
As a result, many banks and lenders have:
- Reduced their maximum loan to value ratios (LVRs) for investment lending, which means investors need larger deposits;
- Reduced interest rate discounts for new and existing investor loans;
- Tightened policies and guidelines in respect of the approval of investor loans, ultimately limiting the total amount of money available to be lent to investors each year; and
- Increased interest rates for existing investor loans.
These changes don’t make it impossible to get an investment loan approved, but it may be a little tougher. Pooling resources with a friend could be a way to achieve your property goals sooner.
Kind of like mixing business with pleasure, it’s important to protect your friendship, and yourself, in case things don’t go according to plan. So just make sure you’re prepared to put your business hat on when making some decisions and think with your head, not with your heart.
I’d suggest you get expert legal and financial advice to guide you both through the process. A solicitor can help with the legals, structure and rules about your purchase and an accredited mortgage broker, like Aussie, can further explain the changes to investment lending and help you choose the right home loan for a joint property purchase.
Here are a few things to keep in mind and potential risks to look out for.
Deciding what to buy
Make sure you and your friend are on the same page when it comes to your investment strategy, how much you want to spend, and where and what type of property to buy; new or old, a house in the suburbs or a unit in the city? If you don’t want the same things then it might not work out.
Future loan affordability
Having a loan with someone else may affect your capacity to borrow in the future, such as for a home for you to live in. A lender may look at the entire shared loan as your potential liability, not just your part, so you both need to think longer term and consider your future plans and how this purchase might affect them.
Time to sell
While it’s important to discuss your planned time commitment to the investment property, circumstances can change. You need to be prepared for the possibility that one of you might want to sell up before the other.
Get it in writing
Avoid arguments by agreeing things in advance, and get it written up by a solicitor. Like a pre-nuptial agreement, a Co-ownership Agreement can help protect you, and your friendship, and should cover every possible issue, rule and solution. Think worst case scenarios, and agree what happens if one wants to sell when the other doesn’t, who decides on the tenant or property manager, if either of you can live in the property at any stage, etc. A little forward thought with clear heads can help prevent dramas later on.
Type of ownership
There are two main types of property ownership or ‘title’ – tenants in common or joint tenants. Typically, tenants in common is the preferred structure when the buyers want separate ‘shares’ of the property and not to own the whole thing. A solicitor will be able to explain these to you and advise what’s best for your situation.
Your home loan
Like the investment property you buy, your mortgage will also be joint, though a split loan lets you keep your individual amounts separate. Split loans are also useful if you borrow different amounts, or want to make different repayments. However, both your names are on the full loan amount so if your friend fails to make their repayments the responsibility can fall to you.
Getting expert legal and financial advice, setting rules in writing and making sure you’re on the same page in terms of future plans and goals can make for smooth sailing and a smart investment decision.
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