Whilst buying a first home seems increasingly difficult, especially in places like Sydney and Melbourne, an expert has warned Aussies should avoid making a purchase with a family member.
Founder of Golden Eggs and money coach Max Phelps said he has seen a lot of siblings who want to combine their savings to enter the property market, but it’s not as simple as it seems.
“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,” Phelps said.
Phelps said there are a number of reasons why teaming up with family to buy property could be the worst decision you ever make.
“First and foremost, at the end of the day, whose house is it? Buying a property is a very personal choice, so in my experience, normally the older one or whiniest one gets their way and the other has to go along with it,” he said.
“Over the long term, this can cause a festering problem, or lead to steadily worse passive-aggressive conversations.”
Another factor, Phelps said, is the pressure the trial and tribulations of the application process can cause.
“Applications are not as easy as they first seemed. If one of the applicants is buying to live in, the other has to be able to cover their own mortgage, or rent,” Phelps said.
“Even just lodging an application means the application isn’t complete until both have provided all their information, and you know that one of you is probably no good with paperwork.”
Here’s the four main reasons why Phelps said buying property with family is not a wise decision, or long term investment.
1. Cost of buying
Phelps said that as your circumstances change so does your life so entering into a 30-year investment journey isn’t always practical.
Say siblings buy a home together, and they both live there, but one gets married and wants to buy the other out. You have to consider that now stamp duty will play a part as the now married couple will have to pay it to purchase the remainder of the property.
“They also had to afford the whole mortgage with one less income,” Phelps said.
“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.”
2. Half the rent, all the debt
Issues can also arise if the property is for investment purposes also. If one sibling wants to buy a home for themselves to live in the bank may deny them, because they will only count half the rental income made, but all of the debt since both siblings are jointly liable for the amount.
“A good broker can solve this problem, but a bank might just say no,” Phelps said.
3. 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 the same, Phelps warned.
“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,” he said.
4. 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,” Phelps said.
Better options for buying
According to Phelps, pooling your savings with family members is not the only strategy you can employ in order to afford a property.
“Consider setting up a family trust to own the property. Both can contribute and have their incomes taken into account, but it provides more flexibility long term as circumstances change,” he said.
“Consider unequal partnerships. An 80 to 20 ratio makes it undoubtedly clear that one person is helping the other to achieve their goals. It minimises the future strain on the minor party's share, it's much cheaper to buy 20 percent of the other sibling than 50 percent if circumstances change.”
Phelps also suggests patience and buying a cheaper property on your own that you can rent out long-term.
“Even if you have to live in a dump for a short-term period to qualify for the first home buyer benefits, it will be worth it in the long term,” he said.
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