What to know before getting a mortgage with friends

Make sure you discuss the property purchase in detail and where possible draw up a written agreement. Picture: Getty

Buying property with friends is the “new normal” across Australia and like any other partnership, communication and transparency are the keys to success.

John Tindall, a Choice Home Loans mortgage broker in Wattle Grove, Sydney, says while buying solo, sometimes with a little help from parents, remains “far and away” the most popular option, sometimes it’s simply not possible.

“Property prices in some cities are exceeding the ability of many people – either as a single person or a single couple.

“In this case, joining forces with another person or couple can mean the difference between getting the property and missing out,” Tindall says.

The broker explains what potential friends-turned-property-partners need to know.

Be aware of the risks

“The primary risk of getting a ‘normal’ mortgage with friends is that all parties are mutually responsible for paying off the loan. So, if somebody has an income ‘hiccup’, like an accident or unemployment, then the other party still has to pay the mortgage.

“There are products where this responsibility can be separated out, such as the Commonwealth Bank’s ‘property share’ product, but the whole property is usually still on the hook. In other words, if the bank has to sell because one party has defaulted, it’s possible the entire property could be sold, even if the other party doesn’t want to sell,” Tindall says.

This information is of a general nature and does not constitute professional advice. You should always seek professional advice in relation to your particular circumstances.

Other risks are arguments and accidents. Who chooses who can live in the property? Who gets to use the garage? How are repair bills split?

“One approach is to have a written agreement that addresses these issues, but arguments will still happen. Again, if one party has an accident that stops them from working for a period of time, who pays the mortgage and the other bills?”

How can buyers make sharing a mortgage work?

Choosing the most suitable mortgage type – one which preferably makes each party responsible for their own repayments, such as a tenants-in-common structure – is a good start, Tindall says.

“If you own property as joint tenants, on the death of one person, the property and debt passes to the other. This is despite what your Will says, assuming you have one. So you need tenants-in-common, otherwise you could unintentionally be giving your housemate half of your property,” he says.

A tenants-in-common structure also allows people to hold different proportions of ownership, for example 60% for one party and 40% for the other, depending on their initial and ongoing contributions.

Next, look at a co-ownership agreement which addresses things like repairs and a future exit strategy, preferably written down and signed.

“It can be done by a lawyer, but it won’t cover all possible issues, so a less formal agreement could work, particularly if both parties agree to consult an independent third party should major issues arise. Appropriate insurances are an important, but often overlooked, precaution,” Tindall says.

This information is of a general nature and does not constitute professional advice. You should always seek professional advice in relation to your particular circumstances.