Family financing or family feud?

In terms of eliciting a split decision from the judges, this one has to be right up there with the most contentious of boxing bouts.

Buying property with siblings, family and friends — ask any mortgage broker, banker or real estate agent about close kin co-financing a property purchase and they’ll usually reveal their inner doubts through an involuntary tic, raised eyebrow or pursed lips. 

Money coach and founder of finance business Golden Eggs, Max Phelps, is more blatant.

“Teaming up with family to buy property could be the worst decision you ever make,” Mr Phelps said.

Buying a first home in Sydney or Melbourne seems to be an increasingly distant prospect for many, who either find their savings don’t seem to climb fast enough, or there’s never enough income to service their ever-increasing debt.

So, getting into the hot property market currently requires some creative approaches to money.

But Mr Phelps said prospective buyers should think twice about buying property with family, warning the long-term implications were serious whenever circumstances changed. 

“We get a lot of enquiries about this; either with two siblings who want to use both incomes to get started, or with parents trying to help their kids,” he said

“It sounds ideal, two incomes, or a bigger deposit sounds like it solves all the problems, but in reality it just leads to a whole new set of issues.”

Reasons to think twice

According to Mr Phelps, there are a number of other reasons buying property with family is not a wise decision and it’s often for financial and regulatory reasons rather than based on the strength of relationships.

• Costs of buying out: If one shareholder wants out for any reason, there are additional stamp duty costs to buy out the departing shareholder. Often the property just gets sold, which is not ideal and defeats the initial reason that they co-bought the property together in the first place.
• Half the rent, all the debt: If the property that was lived in is later rented out, when applying for another mortgage, lenders will only allow the shareholder to count half the rent on the property, but will factor in. A good broker can sometimes solve this problem, but a bank might just say no.
• Partners double any problems: Two siblings might get along really well and not mind helping each other out if one is short for their share of the mortgage, but once they both have their own partners, there’s no guarantee they will all get along as well. If the property is bought jointly and one of the siblings died, the other would become the sole owner, leaving the surviving partner with no inheritance, regardless of their partner’s will.
• First home buyer benefits disappear: If both siblings are first home buyers, then they each get one shot at getting the benefits of a grant, or stamp duty savings. If one family member has already bought before, then the other family member may lose all, or most of their first home benefits.

But it can work

Nobody blinks at the prospect of spouses buying a property but the reality of life is that 33 per cent of marriages in Australia end in divorce. 

The highest rate of annual divorce is among those married for four years — right in the sweet spot of when couples are also buying property.

Friends and siblings are often as united and focused on a common goal as married couples.

Buying with a like-minded bestie can present significant financial advantages.

aussieproperty.com global sales and marketing manager Julie Kelley was quick to acknowledge the pitfalls of such an arrangement, but also conceded that the collaborative approach could work on the basis that plans were strictly adhered to.

“Deposits and loan qualification can be a benchmark out of reach for many but if you decide to buy a house with a friend, the mortgage lender will base approval on your combined income and the average of both credit scores,” Ms Kelley said.

“This increases your financing opportunities, and with two people splitting the down payments and closing costs, you spend less money out-of-pocket.”

When you own as opposed to rent, you pay interest on the mortgage, and that interest is deductible on your taxes. 

“The higher your income, the more benefit you’ll see from this deduction, however, if you own a house with a friend, the amount of interest you each deduct must add up to the total interest paid on the loan that year, and no more,” Ms Kelley said.

Australasian Taxation Services director Linda Lawrance said the structuring of a shared loan was an important consideration that was often overlooked.

“The main advantage of buying property as co-owners with family or close friends would be to pool assets and income to assist with the purchase, whether it be to combine for a deposit or income for mortgage application serviceability,” Ms Lawrance said.

“But the use of a family/discretionary trust can also greatly improve flexibility when distributing income generated from these investments.

“The trustees can effectively decide who the beneficiary will be each year, to minimise tax payable within the group of investors.”

Beyond the clan

Pooling savings equally with family members is not the only strategy that can be employed to achieve property goals.

Rentvesting, parental security guarantees or even partnerships weighted heavily in favour of one investor can smooth the path towards the property ladder.

“Buying somewhere cheaper and renting it out while you rent and live closer to work is a common strategy among first home buyers these days, while parents can also play a role, beyond handing over money,” Mr Phelps said.

“You can get an 80 percent loan on the property in your own name and then get a 20 to 25 percent loan secured by your property and your parent’s property too.”

If you are intent on buying with friends or family, unequal partnerships may be the answer.

“An 80 to 20 ratio makes it abundantly clear that one person is helping the other to achieve their goals.

“It minimises the future strain on the minor party's share and it's much cheaper to buy 20 percent of the other sibling than 50 percent if circumstances change.”