Purchasing with your family member or friend can seem like a smart financial decision in light of New Zealand’s housing market. However, it is important to recognise that there are risks involved if you choose to buy property with family or friends.
Purchasing with family and friends comes with the following risks;
- If you are obtaining lending to fund purchase, then you and your family member or friend will be jointly and severally liable for the home loan to the bank. What this means is that if one of you stops making payments, then the other is liable for the entire borrowing even if you have an agreement about payment in place.
- When obtaining lending, the bank would require a mortgage to be registered on the property title, the mortgage will be an all obligations mortgage. This means not only will it secure the borrowings that you are arranging from the bank for the purchase, but it also secures any future borrowings that either you or your family member arrange in your separate names. The risk to you for example is if your friend arranges a further loan of $20,000.00 for a car and then stops making the repayments, then the bank would have priority to be repaid first on the sale. This means there is no guarantee that you will recover your full equity that you are contributing towards the purchase if there are further borrowings. While half of the property may belong to you, the whole mortgage is considered a joint debt.
- If you do not enter into a Property Sharing Deed then you will be treated as 50/50 owners meaning that even if one of you contributes more, the equity would still be split 50/50 in the future if the property is to be sold.
We recommend you enter a Property Sharing Deed that records ownership and contributions to the property. This can include each parties rights and responsibilities such as;
- Ownership structure and shares;
- Contributions to the property;
- What happens if you intend to sell the property;
- What happens if one party wishes to sell their share;
- How you share the costs of maintenance and loan repayments;
- What happens in the event of a dispute.
There are different ways you can registered on the title of a property to reflect how you own it. For more information on Joint tenancy or tenancy in common see; https://collinsmay.co.nz/services/property/residential-property/joint-tenants-or-tenants-in-common/
If you are looking to buy with friends please do not hesitate to contact our team.
