Buying a house jointly with your parents
Looking to join forces with your parents to buy your first property? Joint ownership is an option.
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With property prices so high in many cities the prospect of buying a home is a long way off for many young Australians. One solution, for those who can afford it, is to buy a house jointly with your parents. By teaming up with your parents, you can make yourself a low-risk borrower in the eyes of the banks and supplement a small deposit or low income. Just make sure you’re fully aware of all the ins and outs of doing so before you decide to buy jointly with mum and dad.
How can I buy a house with my parents?
If you’re co-buying a home with your parents, they would typically use the equity in their current home to improve your borrowing power and the cost of repaying the loan would be shared between the two of you. However, if either you or your parents fall behind on repayments, the other party is responsible for covering their share.
There are two ways you can buy a house in tandem with your parents: you can be tenants-in-common or joint tenants.
Tenants-in-common is the more popular arrangement and allows you and your parents to divide ownership of the property in whatever way you like, such as 60/40 or 70/30. Under this ownership structure, if one party dies, their share of the property is passed on according to the terms of their will.
Under a joint tenancy arrangement, ownership of the property is split 50/50. If one joint tenant dies, their share of the property is automatically passed to the other joint tenant regardless of what their will says.
What are the pros and cons of joint property ownership?
Joint or co-ownership is not for everyone. For the right family it's a great idea but you need to weigh the benefits and potential downsides carefully.
- Break into the property market. In Australia’s expensive property market, co-buying with your parents may be the only way that some young Australians can realise their property ownership dreams.
- Increase your buying power. By using the equity in your parents’ home and sharing the repayments, you can afford to think bigger when choosing your first home. Instead of buying a budget, entry-level property, you could buy the home you want to live in for the rest of your life.
- Buy sooner. Rather than waiting years while you painstakingly save for a deposit, joining forces with your parents allows you to buy a home sooner rather than later.
- Borrow less. By teaming up with your parents you are effectively borrowing less money than you would if you were out on your own, which means that you only have to manage smaller, more affordable repayments.
- Share the responsibility. Sharing the responsibility of loan repayments with your parents takes some of the anxiety out of the situation and means that you have a safety net if you get into any financial difficulty and fall behind on your repayments.
- Circumstances change. While you and your parents might be on the same page about buying a property now, will that still be the same in a few years’ time? As people’s lives change, so do their financial needs and goals. If, in five years’ time, you decide that you want to sell the property but your parents don’t, things can get messy.
- You and your parents are both liable for the loan. If you take out a joint loan for $500,000, you and your parents are both liable for the full $500,000 loan amount – not $250,000 each, as many people assume. So, if your parents’ financial circumstances change and they’re unable to make their mortgage repayments, you’ll need to manage the full loan repayments by yourself.
- Your future borrowing power is reduced. Carrying on from the above point, banks will take into account your liability for the existing joint loan if you want to apply for financing in the future. For example, if you find a partner and decide to buy a house together, the loan you already share with your parents could significantly reduce your borrowing power.
Top tips for buying a house with your parents
While there are undoubtedly downsides that you should be aware of when co-buying with your parents, there are a few simple steps you can take to minimise the risk of any problems occurring:
- Get professional advice. Before you enter into a co-ownership agreement, make sure you get advice from a solicitor or conveyancer. This will ensure that you know exactly what you’re getting yourself into and what you need to do to protect yourself from potential risk.
- Draw up a co-ownership agreement. It’s essential that you and your parents get a co-ownership agreement drawn up before you join forces. This will ensure that there are procedures in place if there are ever any disagreements or if circumstances change. For example, it can outline how to split costs between parties, what happens if one party defaults on their repayments and what happens if the loan needs to be refinanced.
- Have an exit strategy. Before signing on the dotted line, make sure you and your parents both have an exit strategy. How long do you plan on holding the property for? If one of you wants to sell up and move on, how will this situation be handled?
- Update your will. If you select a tenants-in-common ownership arrangement, make sure you update your will with the details of what you would like to happen to your share of the property if you die.
Joint ownership won't work for me - are there any other options?
If joint property ownership isn’t the right solution for you and your family, there are several other ways your parents can help you buy a house, such as:
- Going guarantor. If your parents guarantee your home loan, they agree to assume responsibility for your mortgage if you default on your repayments. This means that if you get into financial trouble and are unable to repay your loan, your parents will be asked to pay out the loan in full, which could put their own home at risk. With this in mind, your parents might consider a limited guarantee, which means that they only have to guarantee part of the loan.
- Lending you some money. If you have sufficient income to manage home loan repayments but you don’t have enough money for a deposit, you might consider asking your parents to lend you some money. This means that your parents can avoid the risks of going guarantor. However, be warned that some lenders won’t classify borrowed money as a legitimate deposit. A proper loan agreement should also be drawn up to prevent any problems from occurring.
- “Gifting” you some money. If your mum and dad decide to give you some money as a gift, they can avoid the pitfalls of going guarantor on a loan. This can increase your borrowing capacity and help you buy the home you want, but your parents need to be certain that the money is in fact a gift and that they don’t want you to repay them some time in the future.
- Buying the property and then renting it out to you. This is a common strategy and involves parents buying an investment property in a sought-after location, for example, an inner-city apartment, and then renting it out to their child. The downside to this is that you’re still no closer to owning your own home, but if you can negotiate cheaper rent with your parents, then you could be able to put more money aside each week to save for a deposit on your own property.
- Buying a property in your name. The final option is for your parents to buy a property in your name or through a trust. This allows you to live in the home while your parents face the responsibility of paying off the loan. The downside to this is that when you become the owner of the property, either when your parents die or when they transfer ownership to you, your parents (or their estate) will face a Capital Gains Tax liability.
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