Buying a Home with a Family Member or Friends
With the average house price in New Zealand being at least 6 times the average income and Auckland housing affordability around 9 times the average income, it may seem nearly impossible to live the dream of owning your own home.
Internationally it is accepted that a house costing 3 times or less of the average income, is considered affordable. This certainly can make getting on the road to home ownership in New Zealand a little challenging to say the least.
However, over recent years we’ve seen a shift in the types of home loan applications we receive – with an increase in family members or friends purchasing homes together to get onto the property ladder.
Family Ownership considerations
With this new type of home ownership there comes some additional considerations. Inevitably at some point a family member may want to move on, they may meet a new partner and want to purchase a house with them, or a parent may retire and no longer wish to hold a mortgage or additional assets.
How does it work when you are both paying the mortgage?
What happens when you sell the house and how do you split any profits?
What happens if one of you earns a lot more than the other?
What happens if one of you puts down a larger deposit than the other?
Although we can’t advise on how the property will be split and where the proceeds go, we can offer advice on the best way to set up a loan so that it is fair and equitable when you do decide to sell and go your separate ways.
Being Fair & Equitable
Let’s use an example. Jane and Fred (brother and sister) are looking to purchase a first home together. With their joint deposit and income, they can purchase a nicer home in a good area. Jane has a $50,000 deposit while Fred only has $30,000. But Fred earns a higher income. He earns $60,000 p.a. while Jane earns $50,000 p.a.
They purchase a home as follows:
Purchase Price = $500,000
Deposit = $ 80,000
Borrow = $420,000
Jointly they need to borrow $420,000 and make repayments on this. Jane feels this is unfair as she put down $50,000 deposit as opposed to Fred’s $30,000. $20,000 extra.
So, our advice would be:
Borrowings of $420,000 will be split as follows.
Jane = $200,000
Fred = $220,000
Because Fred has put in $20,000 less his loan will be $20,000 more. Effectively we are splitting the lending so Fred has one loan with repayments deducted from his account and Jane has another loan with repayments deducted from her account* In addition each party can then choose the repayments they want to pay on “their” loan. As Fred has a higher income, he may choose to pay more off this loan than Jane.
So, when you decide to sell the house and go your separate ways it will be a lot easier to understand who contributed what funds during the time you owned your home.
If you have any questions about this, please don’t hesitate to contact us on 0800 334 338.
*please note that all lending in this scenario through the bank has joint and several liability and will be under joint names. But we are aligning one loan to one person and another loan to the other. If the other person decides not to meet their repayments, then you are still liable to meet those repayments.