Chris’ Corner

Should I Buy a Home with Friends?

As interest rates continue to rise, getting an approval for a suitable loan amount is becoming challenging for many. Especially for those without the golden 20% deposit or access to the ‘bank of mum and dad’. This had led a number of prospective buyers to ask the question: ‘should I pool resources and buy a home with friends?’

When you purchase a property as a couple it is most commonly classed as “Joint Tenancy” where the stake in the property is not divided and the house is jointly owned by the couple. A more suitable method when purchasing with friends is often “Tenants in common” where each person involved has a distinct share in the property.

The ‘Tenants in Common’ approach works especially well for a group of friends who may be introducing unequal amounts of money into the transaction as it allows you to split the ownership amongst the group evenly depending on the portion they contribute. There is an example below to help explain this:

Example:
Person A, B and C have been long term friends and want to purchase a property together. They have found a 3-bedroom 2-bathroom town house in Hobsonville, Auckland for $900,000 they want to put in an offer. Individually they don’t have 20% deposit ($180,000) but collectively they do.

With their savings and KiwiSaver their deposit is as follows:
Person A - $90,000
Person B - $54,000
Person C - $36,000
Total - $180,000 (20%)

One option here is splitting the $900,000 evenly between the party members giving them each a 1/3rd or $300,000 stake in the property. Since person A contributed $90,000 their effective loan will be $210,000, person B with their $54,000 deposit will have a loan of $246,000, and person C a $264,000 loan. This keeps things clean for when you may want to sell the property in the future. i.e. let’s say they sell the property for $1.2m, each person will get $400,000 less their amount of lending owing.

The main benefit of purchasing a home with friends is that it could allow you to get in to the market sooner and start paying down your own mortgage rather than continuing to rent and paying down someone else’s mortgage. In a hot property market, the value can increase quickly which in turn increases your stake equity – providing capital gains that can allow you to move onto your next property quickly. All other costs involved with the property (rates, maintenance, insurance etc) are also shared amongst the co-owners (and can be apportioned accordingly via a property sharing agreement).

This is not for everyone, and it is important to choose who you want to purchase a home with carefully as you are all joint and severally liable for the whole mortgage. If one person can’t pay, the burden will fall on the other owners to cover this payment (lender can pursue any and all parties).

Lenders also have a few restrictions for these loan types, so it is important to talk the scenario through with your Financial Adviser to fully understand the pros and cons and see if it’s the right option for you. With that being said, this is a great way for those who thought home ownership was out of reach to get on the property ladder much earlier than expected.

Back