If only buying your first home was that easy!
It’s often said that first homebuyers should think outside the box when it comes to getting their foot on the property ladder – but not every creative approach is worth its weight in gold. We asked finance experts for the pros and cons of three first homebuyer scenarios aimed at buying a home sooner to see how realistic (or risky) they really are.
SCENARIO 1: SIBLING/FRIENDS BUY TOGETHER
An approach that is becoming more popular as affordability worsens, chipping in together with siblings or friends to buy a home is particularly beneficial for single borrowers, mortgage broker and founder of Two Red Shoes Rebecca Jarrett-Dalton says.
“You can combine your deposits. You can combine your borrowing power,” she says. “But you are joining a committee.”
Buying with a sibling? Make sure you seek legal advice in the process.
There are only two lenders that offer loans especially for this scenario, where the lending is split between parties. If you can’t get one of these loans, you may find that you and your sibling (or friend) will be sharing mortgage commitments much like a married couple does.
“If your mate doesn’t pay his part of the loan, then the bank expects you to pay his share,” she says.
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This becomes particularly relevant if one of you wants to invest in another property. If the loan is a split one, then you will likely only carry your half of the debt. However, if it’s not, the new bank will most likely assess your current liability as being the total remaining debt on the property – not just your half.
Two Red Shoes founder and broker Rebecca Jarrett-Dalton.
First Choice Mortgage Brokers director Tony Bice says it’s important to have a clear strategy in place in case circumstances change. For example, you might agree to sell in five years’ time no matter what.
“You’ve got to be on the same page and it’s got to be written down,” he says.
SCENARIO 2: BUYING A HOME AND RENTING OUT ROOMS
Why pay hundreds of dollars each week in rent when you can buy a home, rent out the spare rooms and let your boarders help you pay down the mortgage? In theory, using the forecasted income of your flatmates’s board to get you a property is a no-brainer. In reality, it’s not going to get you the loan, says author of The Happy Home Loan Handbook Aaron Christie-David.
“You can’t use that projected income for a bank’s serviceability calculator,” he says. “You could do it after settlement to help with cashflow (for future loans) but a bank won’t go, ‘rent a bedroom out and we’ll factor that income in’.”
The Happy Home Loan Handbook author Aaron Christie-David.
In fact, rentvesting could be a more realistic approach, says Bice. His clients recently purchased an investment property and built a granny flat behind it in order to increase their rental income and pay down their mortgage.
SCENARIO 3: BUYING WITH A FAMILY GUARANTEE
A parental guarantee comes with two main benefits for first home buyers, says Bice.
It allows them to purchase a home without saving for a deposit and avoid paying LMI as long as there is plenty of equity available.
But it does come with a risk. The risk is that if the borrower stops making mortgage repayments and the bank takes possession of the property, it may not have risen enough in value to cover the 20 per cent secured by the parents’ property – which means the parents will be liable for the shortfall.
Unfortunately, using an income projection from flatmates is not going to get you a home loan. Picture: Jonathan Ng
Another option is for the parents to offer a gift or a loan of money, says Christie-David. Each party should consider the financial ramifications of such an option, including whether or not it will impact the parents’ retirement planning or pension eligibility and the time frame involved if the funds will be paid back.
TIPS FOR BUYING WITH A SIBLING OR FRIEND
If you are considering buying a property with a sibling or friend, there are some steps you can take to avoid being tied together at the hip financially later down the track. Here are three options to consider.
1. See a solicitor – Signing a co-purchasing agreement before buying enables you to figure out what should be done if either of you falls into hardship, gets married or wants to leave the arrangement.
2. Arrange a split home loan – this separates your financial commitments and could help you further down the track if you want to buy a property separately from one another.
3. Agree to sell – You could agree to sell after a set period of time so that you both take advantage of capital growth but avoid future financial entanglement.
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