Thinking of buying a house with a friend or family member and living with them? Here’s how
Saving up a down payment is hard work, and it’s getting more difficult to achieve the required savings as prices continue to rise in certain hot markets (due in part to low interest rates spurring high demand), outpacing what you might be able to save on a monthly basis. Thus, pooling resources, and buying a home as a group with the intention of living together, is becoming increasingly more popular.
Whether you’re a first-time homebuyer, or this is your second or third property, the financial benefits of pooling resources are strong. First, it usually results in a greater down payment, which will hopefully amount to more than 20 per cent, and can eliminate mortgage insurance premiums. The monthly operating costs of the home can be split if both parties are living in the property. Larger home maintenance costs, like replacing the water heater, can be shared. And, in many cases, this means the two parties can buy a better home, with all that additional qualifying power, having more total household income that the bank can rely upon for the mortgage application.
From an interpersonal standpoint, it results in friends and family getting much more cosy, and that can be fun, but with some nuances.
If your stomach is turning while you’re reading this, you’ve maybe had a negative experience in the past mixing money with friends and family. Or maybe you’ve just heard a few too many horror stories of co-ownership going terribly wrong. The reality is that co-ownership can work, and many cultures have been doing it for centuries. But to avoid relational and financial hardships, crystal-clear boundaries must be established first.
Get real about money matters
Many factors beyond the down payment go into qualifying your group for a mortgage; credit scores, income, length of time at your current employer, debts, assets, monthly obligations for loans and car payments, and so on. This qualifying process is raw and revealing. Pay attention to the financial condition of the other purchasing party. If they’ve got a bad track record of skipping payments, hopping from job to job, taking on too much debt, or have declared bankruptcy, they might not be a reliable purchase partner. In worse cases, they may have a negative impact on your ability to qualify and may thus need to be removed from the application.
Remember to also consider everyone’s capacity to keep paying the costs on an ongoing basis; it’s not just about qualifying today! From the bank’s perspective, whoever is on the mortgage is liable for the payments going forward.
Have a legal agreement in place
This is exactly like having a pre-nup with a spouse. Your legal agreement will iron out the details of the finances, and responsibilities, going into this business relationship, and how it’s going to be handled if the relationship dissolves.
Are you owning the property in a 40:60 split? Is it 50:50? How are you basing the ownership split? Is it off of the size of the initial down payment, or possibly who will pay what percentage of the ongoing costs? If this math hurts to think about, don’t worry. Your lawyer will help you establish guardrails for ownership. They will also step you through how best to structure the deal.
Think of the two primary structures like this: first, as if you were a married couple (if one party passes, the other party gets the deceased’s portion of the house); or second, as if you’re not married, but friends (if one party dies, their portion flows to their estate, and not the co-owner of the property).
Last, the lawyer will assist in helping you think through tougher scenarios, like one party wanting out of the deal, or wanting to convert their portion of the property into a rental.
Who gets to use what parts of the space and how will maintenance be handled?
Lay out the rules of the house. Does everyone get to roam around the entire house, at all times? Or are you going to split up the living space to be separate from each other (very common when the property contains a suite)? Will you share a laundry and mud room? Is there a schedule for parking in the driveway versus on the street? Is it OK to keep the TV on late into the evening? Be precise about how the home will be shared, and work through differences of opinion.
Draft up a schedule for maintenance responsibilities, too; shovelling snow, clearing the eavestroughs, cleaning the interior of the home, changing the furnace filter, calling the plumber when the toilet backs up, cutting the grass, keeping the flower beds clear, and so on.
Clarify how ongoing costs will be handled
Will you pool your money into a joint account each month and pay all the bills from there? Or will you e-transfer one person your share, and they’ll pay all the bills on behalf of the group? At a minimum, my advice is to ensure everyone has access to see the bills and online mortgage statements. And, DO build up an emergency reserve fund for unexpected home expenses.
Flexibility can be your friend
Sometimes these co-purchase scenarios don’t work out well or life circumstances change. One party may get married, divorced, have a child, want to sell, and so on. Having a flexible mortgage structure can be super helpful for both parties. Fixed rate mortgages offer extremely low rates at the moment, but the break penalties can be very high if you need to get out of them. Variable rate mortgages can offer more flexibility, but the rates are going to shift alongside the Bank of Canada rate.
Don’t jump too quickly!
You might have a great relationship with your friend or uncle, but rushing to purchase, without ironing out the details, will inevitably lead to strain on your relationship, and potential financial consequences. This also means being crystal clear about what you’re purchasing, too. Take your time to set up clear parameters for your real estate transaction and ongoing business relationship! That way, you’ll be set up for success.
This article was originally published in The Star. Lesley-Anne Scorgie is a Toronto-based personal finance columnist and a freelance contributing columnist for the Star.
