Much to consider in property partnership

Those who are keen to get on the first rung of the property ownership ladder but don't have the deposit and/or income behind them to do it on their own might consider 'buying in partnership'.

This involves jointly purchasing a property with someone, such as a family member or perhaps a close and trusted friend.

It gives the potential to access double the deposit and double the income to secure a home loan and it could also be a great 'stepping stone' strategy for people to buy their own property in the future, by benefiting from capital growth in a jointly purchased property over several years prior to selling.

While it can be one way of making that all-important first move into property ownership, there's much to consider in this strategy, according to Smartline Personal Mortgage Advisers.

"For those who are actually very keen to be able to buy a property but perhaps feel like they're having to sit on the sidelines as a result of not having enough initial deposit or the income to service a home loan, buying in partnership can certainly be an option," says Smartline managing director Chris Acret.

"However, there are a few considerations that people need to be aware of before making such a move."

The main negative to buying in partnership, says Acret, is the way banks view the commitment, with such an arrangement having the potential to severely restrict borrowing power in the future.

Take the example of two brothers who are looking to buy an investment property together (as they still want to live at home for a few more years) for $400,000, renting it out at $400 per week.

The plan is to keep it for at least 20 years, with each individually buying their own owner-occupier properties in the next three or four years.

However, when one of brothers goes to purchase his own home with his new wife four years later, the bank doesn't view him as having a $200,000 liability (50 per cent of the $400,000 house value); it views him as potentially having the full $400,000 debt.

The brother and his wife, on their earnings and savings, were originally able to borrow $600,000 for their first house together, but now discover they can only borrow $200,000 if the husband continues to keep his half-share of the investment property with his brother – significantly impacting on their plans.

This means the brothers will either have to sell the investment property – a move the other brother may be unhappy about – or the couple may have to delay their plans, perhaps for several years.

Acret says buying a house with someone else is very much like going into business with a partner.

"From the outset there needs to some honest discussions about what each wants to get out of the purchase, the proposed timeframes for holding the property, what happens if one wants to get out earlier and what will happen in a worst case scenario," he says.

"This strategy works best if the two people are at similar stages in life and have similar goals."

"For example, it might work well for two 23-year-olds who have just finished apprenticeships and who agree that they will hold the property for five years, to then sell up and split the profits, allowing each to buy their own home individually."

"You also need to ensure you and the person you are buying with have similar values around things like managing money."

"Problems can arise if one of the buyers manages their money well, pays all their bills and time and ensures they always save something every week while the other has erratic employment, has a string of unpaid accounts and is always borrowing money off friends and family."

"Keep in mind – if the other person can't make the monthly mortgage repayments, you're liable for the whole amount, not just 50 per cent."

With responsibility for a significant debt as a result of taking out a home loan, both purchasers might want to consider income protection and disability and life insurance, otherwise the inability to work for a short or extended period of time might result in a reluctant sale.

Alternatives to buying in partnership could include a family guarantee or buying the first property as an investment while continuing to live at home.

A family guarantee is when family members – generally parents – use their home as security for a period of a few years for the amount their children need to borrow, or in instances where the child might have the required deposit but is unable to service the repayments on the home loan.

"Another very powerful strategy is to stay at home with your parents and purchase your first property solely as an investment property, renting it out to tenants from the outset," Acret says.

"This way you're effectively doubling your purchasing power as a result of receiving rental income which should cover much of the home loan, together with the money you’re saving by living at home rent free."

"While this strategy might have some impact on your ability to access first home buyers stamp duty concessions in the future, the benefits of having a tenant may negate this loss."