Joint home loan: Tips for co-buying property

Buying a property with a partner, friend or relative is a smart way to split the risks and financial outlay. The biggest advantage is that it increases your borrowing power – instead of being approved for a $400,000 loan on your own loan, you could be eligible for $700,000 with a co-buyer.

Borrowing with a partner allows you to split the costs of homeownership, but there are some risks to be aware of, and choices you need to make from the outset to ensure that you manage your finances correctly.

At the beginning: plan how costs will be shared

Property ownership comes with several associated costs so it's important that you lay down the ground rules about how you will split the expenses. From mortgage application fees to stamp duty to repairs and maintenance, you'll need to have an allocated budget in place to prepare for your financial responsibilities.

First up, you need to make sure you understand your cash flow and budget, and ask for advice about how you can manage the costs with your home buying partner.

You may want to consider setting up a joint bank account with sufficient funds to cover your mortgage and property expenses. This may involve both you and your partner depositing a certain amount into the account each week.

Also if you apply for a loan with a linked offset account, consider who will be responsible for managing this account and making additional repayments towards the loan? If one partner can't make their payment one month, what is the back-up plan?

What are your plans for today, tomorrow and the future?

The fact is that although you may have your eyes set on a particular type of house at this time, your needs change as your family grows.

This means you may need additional space both indoors and outside and may find certain amenities are more desirable, such as proximity to the beach, the city or other relatives with children.

All these things need to be taken into account before even planning on buying a new home, since without careful consideration, you might move out after a couple of years and find a new property.

Moving will bring with it the stress of putting a property on the market, paying agent fees and having to pay stamp duties and removal costs once a new property is found. It may also include the need to take out a new loan if your loan isn't portable, meaning you'll pay establishment costs and other fees once again.

Financing a new property purchase like this will also require a great deal of research and a careful account of your budget, credit rating and debts.

Considerations when buying a property with a partner

Here are some things you may want to consider before joining forces:

• How much can you both afford to borrow?
• Do you both have good credit history?
• Do you both have job security?
• What's your strategy? (e.g. capital gain or positively/negative geared property)
• Is this an investment or owner-occupied property?
• If you are renting it out, how will the earnings or losses be split?
• What will the property ownership structure be? (e.g. joint ownership 50% each?)
• Have you done your due diligence? (e.g. research and sought expert advice)
• Have you gotten a rough idea of the upfront costs you'll pay, such as stamp duty, legal costs and insurance?
• Are you eligible for the First Home Owner Grant or stamp duty exemptions?
• Have you compared suitable loans available in the market and decided what type of loan you want?
• What are your plans for the property in 2 years, 5 years and well into the future?

How much can I afford to borrow?

When determining your borrowing capacity, the lender will take into account your combined income, assets, credit history and expenses.

To estimate how much you can afford to borrow, you can use our borrowing power calculator below. Simply enter your details, including your income and expenses.

Remember to select 'joint' for the application type and include both your incomes.

• Get an estimate of your borrowing power
• Speak to a lending expert about your borrowing power

How to save for a property deposit

• Reduce existing debt. Review both of your finances and spending habits. Request a copy of your credit files so you can review any debts that you have listed against your names. This may help you work out whether there is room to consolidate or eliminate any debts, such as credit cards or personal loans. Next, you should identify your combined monthly expenses such as utility bills, transport and food to see if you can cut back on any of these costs. For example, if you've been spending $100 on petrol each week, consider taking public transport to work. Think about the expenses that you can forgo such as gym memberships or coffee and direct the surplus cash towards your deposit fund. Work with an accountant so you can understand how much you can set aside each month to go towards your joint deposit.
• Identify a savings target. Once you've finalised your budget plan and worked out how you can both lower your ongoing expenses, the next step is to determine how much you need to save for a deposit. Depending on your timeframe and how much you've already saved up, most borrowers try to save up 20% of the property purchase price to avoid paying lender's mortgage insurance (LMI) (for a full documentation home loan). For example, if you wanted to purchase a $750,000 property, you'd need to come up with $150,000 to complete the required deposit. Speak to a mortgage broker during this stage so they can help you understand your borrowing power which can dictate your deposit savings goal.
• Get creative. When it comes to make extra cash, think outside the box. Consider using skills outside your workplace. For instance, if you're a graphic designer or a photographer think about taking on freelance jobs on the side. Other ways to make cash include renting out a spare bedroom in your current property or becoming an Uber driver.
• Joint savings account. Open a joint high-interest account that is dedicated to your deposit savings. Try to separate your deposit savings from your other accounts and keep tabs on how much interest you're earning each month. Remember that you can always ask your current lender for a better rate (use your customer loyalty as leverage). Making regular deposits into a high-interest savings account will demonstrate to the lender that you have good financial discipline.

Finding your dream home

There are many ways to find a home. You can go down the professional route and enlist the services of a buyers agent or financial planner. They'll review your budget, inform you of the costs that you'll likely pay, as well as of the trends and offers that are currently available on the market.

You can also go down the buying route yourself. This will require a sound knowledge of the market you're looking to buy in, as well as a large amount of research. For more information consult the first home buyers guide.

Pre-plan an exit strategy

While you may not want to think about it, it's wise to plan for worst-case scenarios in the event of future change, such as:

• One of you dies or faces a serious illness or disability
• One of you encounters a change in employment or income
• A relationship breakdown
• Bankruptcy or changes in the property market that force you to sell the property at a loss (after fees and charges)

Sign a co-borrowing agreement

Unfortunately, relationship breakdowns occur. If you want to protect your finances, it may be worth signing a co-borrowing agreement which will outline the future management and distribution of your assets in the event that the relationship ends.

A co-borrowing agreement can be arranged by a solicitor. This agreement will outline what will happen to the property and regular repayments in the unfortunate event of relationship breakdown.

To develop your exit strategy, include special clauses in the co-borrowing agreement or in your will. In the event that you pass away, your co-borrower will assume responsibility of your mortgage repayments. Learn more about what happens to your home loan if you die.

You can also take measures to protect yourself from market changes such as taking out a fixed-rate or split-loan mortgage to protect you from interest rate rises. Consider opting for a home loan with a portability feature or one that allows you to take a repayment holiday in the event that you experience financial hardship.

It's advisable that you have a contingency buffer of funds for a 'rainy day' by keeping $10,000 - $15,000 in an offset account.

Conduct a home loan comparison

Doing some groundwork is highly important if you're thinking of purchasing a property with a partner. You need to carefully evaluate your strategy and the type of home loan and features that will suit your financial situation.

For instance, you may want to opt for a home loan that allows you to make unlimited extra repayments as this will help you to minimise the amount of interest payable over the life of the loan.

Future changes to property ownership

If you need to change the property ownership of your asset, you'll need to budget for various costs including stamp duty and capital gains tax (CGT) and you'll need to complete the required paperwork to ensure that the property title remains up-to-date. If you need to

If you need to remove your partner's name from a property title, you'll need to complete a transfer of title form which can be accessed from your relevant state government department. Keep in mind that you may also need to get new mortgage documents drawn up from your lender.

Learn more about refinancing your home loan following a divorce to see what options are available to you. In these situations, you should seek independent advice from a conveyancer or a solicitor.

Top up your insurance

Before completing a transaction, it's a good idea to get yourself covered for any incidences which will render you unable to service your mortgage. If anything happens to you or your partner, the financial burden may be too significant to bear without insurance. Make sure you take out a life insurance and home and contents insurance policy.

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