Looking to join forces with your parents to buy your first property? Here’s everything you need to know.
The difficulty that first home buyers face when trying to break into the Australian property market has been widely documented. As property prices in several capital cities continue to soar, the prospect of buying a home is a long way off for many young Australians.
But there is one way you can get the funding you need to afford to buy a home. By teaming up with your parents to buy a house together, you can break out of the rent cycle and buy your very own property. 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.
If you’re looking to buy your own property and use your parent’s home as a guarantee, read our guide.
Why might I want to buy a house with my parents?
The most obvious reason you might have for wanting to buy a house jointly with your parents is that you don’t have enough of a deposit or a sufficient income to buy a house on your own. By teaming up with your parents, you can make yourself a low-risk borrower in the eyes of the banks.
But there are several other reasons why this approach, known as co-buying, might be a good idea. It allows you to buy the house that you want, in the area that you want, without breaking the bank. And in a time when Australia’s population is ageing at a rapid rate, the flexibility of being able to set up a multi-generational family living arrangement also has plenty of benefits.
How can I buy a house with my parents?
Co-ownership is when two people share ownership of a property. 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 advantages of joint property ownership?
The advantages of co-owning a property with your parents include:
- 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. It could give you the financial clout you need to stop paying rent and become a property owner.
- 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. With a larger deposit saved, you can also avoid the additional cost of lender’s mortgage insurance.
- 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. Taking out a home loan on your own is a significant financial commitment and it can put you under a lot of stress. 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.
What are the disadvantages?
Of course, there are also plenty of risks attached to co-buying with your parents, including:
- 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.
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.