People usually buy with friends to increase their borrowing capacity. While buying a property with friends might seem fun at the start, but when circumstances change and one partner wants out, things can turn messy. Here are three of the most common risks:
1. Future home loan affordability is affected. Having responsibility for a loan jointly with others may make it harder to get a future loan for another property as affordability is assessed on an individual’s income. If one co-owner wants to buy a second property, the bank will take into account that first loan – but they’ll assess the whole loan as that borrower’s responsibility.
2. One owner wants to sell up. Problems can also arise if one co-owner wants to sell when the others don’t and you may end up in court which can be expensive and stressful. The party opposing the sale bears the onus of dissuading the court from ordering a sale. If a co-owner doesn’t wish to sell, the court will look at whether the land is easily physically divisible and also at the costs of subdivision. The court will also look at hardship on the minority if the greater benefit to the majority were to prevail.
3. You are both guarantors for each others loan, if he defaults on his portion then you would be called upon to make his repayments. So if you have concerns about your partners financial position then simply do not buy a home together.
It is important to seek independent legal and financial advice prior to signing a co-ownership agreement, loan contract or property purchase contract. All parties must fully understand their rights and obligations as well as the plans each participant has for the property and their loan repayment strategy.
Buying property with family or friends is becoming increasingly common. It’s usually set up as a tenants-in-common purchase, which lets two or more people own an interest in a property.
In order to avoid any problems in the future, it’s smart to enter into a Co-Ownership Agreement. Among other things, a Co-Ownership Agreement sets out the terms of on-selling shares in the property, the proportion of ownership and liability for costs such as the mortgage, maintenance and upkeep. You should talk to a solicitor to make sure your legal rights are protected.
