Everyone has most likely thought about it at least once. “The BEST way to get into the property market is buying property with family” But is it really? Before you jump in blind; make sure you look at all your options first.
I have seen my fair share of clients in my 20 plus years in the finance industry that have decided that buying property with family (other than their spouse/ partner) is the best option. I have also seen clients enter into a property purchase with a friend which creates it’s own set of issues. Whilst pooling your savings together to form a larger deposit is a great way to enter the property market as soon as possible; it does create some issues down the track if you want to borrow money own your own. The situation becomes a little more difficult if the property that you have purchased is an owner occupied property.
When you applied for your loan with your family member; your lender would have taken into consideration both incomes, assets, liabilities and expenses. Your lender would have approved your loan providing that you had enough income to cover your current and proposed debts (and living expenses) If the loan was to be used for investment purposes; the lender would have also included the rent you will eventually receive to boost your ability to service the loan.
Move forward a few years… You are now looking at buying your second property; this time on your own (and with your partner/ spouse if you have one) This is where things get a little tricky. You see your chosen lender (and this could be the same lender that you purchased your first property with or a new one) are going to look at your individual income(s), assets, liabilities and living expenses. The existing home loan that you have with your family member (or friend) now becomes your biggest liability as most lenders will assume that you are responsible for 100% of the home loan debt, but only take 50% of the rental income (if the property is being tenanted out) Worse still; the lender will only apply 80% of the half share of the rent to demonstrate serviceability. Very few lenders will apply what is known as a “Common Debt Reducer” to this loan. A Common Debt Reducer; in simple terms means to allocate half of the loan debt and half of the rental income; this is assuming that you have a 50% share in the loan and rental income. You will also need to consider that any lender that adopts the Common Debt Reducer method will also need proof that ALL parties can afford their share of the debt. This will mean obtaining evidence of the other parties income, liabilities and living expenses. In some cases this may prove difficult if the other party refuses to provide this information.
Before entering into such an arrangement; it is highly recommended that you seek the services of a professional Mortgage Broker to discuss all of your options before looking at buying a house with family. It is further recommended that you seek the services of a suitably qualified solicitor and draft an agreement that covers exit strategies should either party want to sell their share of the property or apply for a loan on their own.
For more information; please feel free to contact South West Lending Solutions on 02 8007 5626 or 0414 727 308