Purchasing property with others provides flexibility
As would-be homeowners grapple with the realities of buying a home in these challenging economic conditions, it’s no surprise split loans are on the rise.
Borrowers have been hit with higher interest rates, rising property prices and reduced borrowing capacity.
Sharing the cost of buying a property makes sense from a financial point of view and may be great way for buyers to get a foot on the property ladder.
It comes at a time when many borrowers are becoming skittish about borrowing the maximum amount they qualify for.
Julian Finch, (pictured above left), founder of NSW family-owned specialist brokerage company Finch Financial Services, has seen a substantial rise in the number of people seeking to purchase property with others at a time when the RBA has handed down a run of interest rate rises.
Finch said while split loans were a relatively new development in the mortgage marketplace, it was a solution that bank lenders and brokers had been seeking for many years.
He said while there were still some forms of assistance available for first home buyers, the price caps could be limiting, and the properties needed to be owner-occupied for a period.
“The split loan option gives people a bit of flexibility to purchase with a friend – which may allow a higher purchase price, while still only being responsible for their portion of the debt,” Finch said.
“This may also allow for purchasing as an investment rather than owner occupation – so that further reduces the commitment with rental income being earned as well as providing some taxation benefits.”
Finch said a number of financial institutions had developed a suite of products to help people share the costs and split the loan liabilities and repayments across all the owners.
“The products that we refer to as split home loans can be easier to manage than you realise and you can still maintain your own separate finances,” Finch said.
“If you’re thinking about investing in a property with other people while keeping your finances separate, this is a great option.”
Before signing a shared loan, plan ahead
Finch warns there can be risks involved with split loans.
“As a broker that knows a lot about split loans and helps a lot of people, there are some important things people need to know, Finch said.
“Firstly, the type of loans that you’d be eligible for are standard variable rate home loans, fixed rate home loans, basic home loans and lines of credit.
“Secondly, these types of loans can only be used for certain circumstances such as, owner occupied or investment property purchases, home renovations, consolidation of personal debt, personal needs or personal investments.”
Eligibility a consideration for split loans
Finch said there were a number of prerequisites for shared loans, including that all borrowers had to be owners of the property. This means that third-party guarantors are not allowed.
“You must also be able to demonstrate that you can manage the minimum required repayments for your home loans,” Finch said.
He also recommends loan parties seek independent legal advice before entering a property share agreement, so all parties are fully informed when they sign the statutory declaration.
Benefits of split loans
Finch said the main benefit of a split home loan was the flexibility to structure the loan to suit the parties’ financial needs.
“You may split the loan with the other party in whichever you choose to, and you can also choose how you want to manage your own portion of the loan,” Finch said.
“Each borrower has the flexibility to structure their part of the loan to suit their own needs and can make their own decisions on the type of loan, amount to borrow, repayment structure and the duration of the loan.”
Split loan risks to consider
“As with all financial transactions there are risks involved, apart from the standard investment risks, it is probably important to ensure you are entering a transaction with the right type of person,” Finch said.
“It is probably a good idea to have all the ownership structures setup clearly and appropriately, and given that the product is similar in a way to a security guarantee
it is absolutely necessary to ensure you understand your rights as a guarantor as well your responsibilities as a guarantor.
“In the event that the relationship does go a little pear shaped, it's important to communicate and seek assistance at the earliest opportunity so you can prepare for and make an effort to salvage what you can from the deal.”
Finch said from the lender’s point of view, if a borrower was unable to meet the repayments, the lender would seek to recover debt from them first and as a last resort, the lender would step in to assist in the sale of the property.
Other split loan factors to consider
Finch said borrowers needed to think about how they would manage if the other party wasn’t able to fulfil their part of the deal due to unplanned circumstances and it was vital borrowers had a home loan specialist to guide and advise them.
“I would also strongly advise having a formal agreement drawn up to clearly state each party’s separate obligations,” Finch said.
National Mortgage Brokers (nMB) managing director Gerald Foley (pictured above right) said he was aware that brokers were receiving an increasing number of enquiries about split loans. As affordability got tighter, new ways of entering the property market emerged.
“This presents as more tenants in common transactions, as well as many more family pledge mortgages,” Foley said.
Split loans were attractive to both family and friends, however, Foley said the factors to be considered were no different whichever structure or situation was in play.
“Being able to pass on ownership of your share is very attractive, and cleaner, for each party to protect their individual assets.”
Foley agreed with Finch that brokers were well positioned to assist borrowers interested in entering into a split loan and ensure all parties had clarity about the nature of the relationship they were forming.
Foley said some key issues to consider include: an exit strategy, what happens if the relationship changes, the tax implications of the purchases and maintenance and who is responsible financially/physically for this.
Have affordability issues meant you’ve noticed more people considering split loans? Share your thoughts below.
