Autumn 24
Buying a home with a friend
ISSN 1836-9871
Budgeting hacks
HAVEN MONEY
MATES RATES Would you buy a home with a friend? As property prices rise beyond the reach of some single-income buyers, more Aussies are turning to mates to get a foot on the real estate ladder. And support for this alternative ownership pathway is growing. Last year, the Federal Government changed rules around first homebuyers’ schemes to allow friends and family to access financial support for the first time. Previously it was limited to couples and singles. Lenders are responding with new loans designed to simplify the process of borrowing together. Of course, if you struggle to split a pizza with your mates or are still holding a grudge over something your sister said in high school, it may not be for you. But advocates say buying with friends and family is not necessarily any riskier than buying with a spouse, given Australian marriages last on average eight years. And for younger Australians watching property prices rise, this may also offer an opportunity to break into the property market sooner than flying solo. But for those considering giving mates rates a go, getting sound legal and financial advice is crucial.
First up, get a good lawyer. You’re going to need a pretty comprehensive friendship version of a pre-nup. The good news is this can actually be a positive experience. Planning for a future where you may not be living with each other is a whole lot easier with a friend than a romantic partner. And if it’s not – that’s probably a big red flag. The first thing to settle is the legal structure of your co-ownership. Friends who buy property together most often do so as tenants in common, rather than joint tenants.1 The major differences are:
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• Renovation/decorating disputes. • Maintenance responsibilities. • Insurance arrangements (including income insurance for co-owners). • Contingency plans if one or both owners are unable to make loan payments. • Exit strategies.
The financials One of your broker’s greatest skills is they’re the voice of other people’s experience and will have undoubtedly helped others in your situation. They will also, of course, talk you through the range of products to suit tenants in common, some of which allow co-owners to hold and pay separate loans for jointly owned property.
The friendship
The legals
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A lawyer will draft a tenants in common agreement which should address possible sources of conflict, including ways to remedy unforeseen issues. Many law firms now offer online templates outlining potential issues, such as:
Tenants in common
Joint tenants
Co-owners can have specified shares in the property. E.g. 50/50 or 70/30. Each can sell their stake without the consent of others.
Co-owners have an equal stake and must agree to sell the entire property, or one may buy the other out.
If a co-owner dies, their share of the property transfers to their estate and is distributed accordingly.
If a co-owner dies, their stake passes to the remaining co-owner.
https://sunstateconveyancing.com.au/understanding-ownership-options
Respect isn’t just a song, it’s the basis of any healthy relationship. Before you go house-hunting, draw up a list of must-haves and negotiable features. This will obviously be much easier if you are looking for an investment property, rather than one you plan to live in together. Be prepared to consider everything and think how it will work in the long term. For example, many co-owners look for properties that either have dual living or have the potential to add it. Be prepared to let properties go if they don’t tick both your wish lists.
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Case study Emily and Kit
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Blue Mountains, Victoria “Friendship and money don’t mix.” That was the advice Emily and Kit heard time and again from well-meaning relatives and friends concerned about their unconventional plan to buy a property together in 2020. Back then, the long-time friends – both separated and house hunting – were comparing notes about the lack of affordable options in their Blue Mountains community when Emily had an idea. “Hey, would you consider going in with me and doing this together?” she asked Kit. While neither could afford what they wanted on their own, pooling their resources could slingshot them into a different league, making it achievable and then some. “Immediately, we both really liked the idea and started talking about what it might look like. We went to a mortgage broker to get an idea of what our combined buying capacity might be,” Emily says. Everyone, including the broker, thought it was a pretty unusual plan. “Everybody warned us to be careful, which I found very interesting because nobody had warned me, ‘Oh, you might want to watch out,’ when I was buying property with my ex-husband,” Emily notes with a wry smile. “The financial settlement in our marriage was very difficult to negotiate and took a very, very long time.” By comparison, buying with a friend – where both parties go in with their eyes open and contracts drawn up – seems far more sensible. “I think we were smart in that we got ourselves a mortgage broker, we made a list of our pre-requisites, and we signed a legal contract.” she says. The pair purchased a property together in 2021 and haven’t looked back.
“Time will tell, obviously, but we’ve just had such a positive experience,” Emily says. “It’s given us a quality of life that we would not have been able to achieve on our own. “These alternative pathways to property ownership are going to become more of a necessity because it’s extremely difficult to get that first buy in the property market now.” Emily and Kit’s key recommendation to others is to get legal advice at the outset. “Our lawyer was great. He took us through a whole lot of different contingencies. Obviously, we discussed what would happen if somebody wanted to leave, but there were also things we hadn’t thought of, like what would happen if somebody died, or somebody wanted to renovate. Or what if one of us wanted to move someone else in?” Their lawyer also helped Emily and Kit work out how to structure the purchase, opting for a tenants in common arrangement, with each holding separate loans, paid independently. When it came to settling on a property, they weren’t fussy on aesthetics, but respected each other’s non-negotiable requirements. For Emily, it was a bath and storage for music equipment. For Kit, it was a garden and proximity to a train station. They landed on an ideal property with two dwellings on one block, setting them up to live more as neighbours than co-owners. “It couldn’t have turned out better,” Emily says. “And we’re very aware we couldn’t have done it without each other.” “It’s like owning our own homes, but it’s also like we’re in it together and we definitely have each other’s backs. There’s more than one way to make a home and more than one way to be happy in life.”
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HAVEN LIKES
HAVEN MONEY
Budgeting hacks & apps If you’re like most Australians, there hasn’t been a whole lot of cash accumulating in your savings account recently.
These socks say it all really. If you have a dog-loving person in your life, their birthday pressie is sorted for this year.
www.thirddrawerdown.com
At the peak of COVID, the average household was saving a whopping 24 per cent of earnings. That figure has fallen off a cliff, plummeting to a dire 1 per cent at the end of 2023, according to the Australian Bureau of Statistics. The moral of the story? It’s easy to save money when you can’t go anywhere or do anything. Here’s some ideas to cut costs without living the life of a hermit.
Entertainment, health and eating out
HAVEN WIN
Crack the codes: When you hit the checkout of any online site, quickly Google the business name and “discount code” or “coupon”. You’ll be surprised how often you turn up a small saving – from $20 off escape rooms to discounted entry to tourist attractions. Popular sites to find discounts, cashback and code offers include Groupon, cashrewards, Cudo and OzBargain. Get fit for free: Ditch the gym membership and design your own fitness plan from a surprising array of free classes run by not-for-profits and councils. A few ideas to get you started: With 70 per cent of Aussie homes housing a pet under their roof, here is a comp for the pet people. It’s common knowledge that many pet owners resemble their furry or feathered friend. So, we’re on the hunt for a photo of a pet and their person, who share an uncanny resemblance. For scientific comparison, the photo should be of the two of you together.
• Parkrun is another great free activity to keep you moving and motivated. It’s a volunteer-led 5km run held at 7am every Saturday at nearly 500 locations around Australia. There are also 2km runs for kids at 8am Sundays.
Include: your name, address, email, phone number and the name of your mortgage broker.
Dine out on their dime: Most chain cafes have loyalty apps that offer great freebies and discounts for sign-ups if you don’t mind handing over your details.
Dates: opens on February 7 and closes on March 21.
Go on a council-funded adventure: Your rates pay for more than rubbish and footpaths, so make the most of it. Free activities (including equipment) provided by councils around Australia during the summer break include stand-up paddleboarding, kayak tours, fishing lessons, skateboarding and scooter classes, indoor and outdoor rock climbing and art classes. It’s particularly helpful to keep kids entertained on school holidays.
Terms and conditions: visit http://bit.ly/HavenWin
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• If you prefer to make a splash, many councils offer free or low-cost aquaaerobics and deep-water running classes at local pools. (Some councils also fund land-based fitness and wellbeing classes such as tai chi and Zumba.)
How: email a photo of you and your pet together to havencompetitions@afgonline.com.au placing ‘Pet lookalike’ in the subject line.
Winner: will be decided on March 22 and notified by telephone after this time.
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• Live Life Get Active partners with local councils and businesses from Perth to Penrith to offer free weekly cross training, yoga and boxing sessions in local parks. Check out their website for times and locations.
HAVEN FOOD
Decadent sweetcorn soup Serves 4 This delicious soup makes the most of the abundance of corn at this time of the year. 5 sweetcorn cobs 700ml water
Petrol
1 tbsp butter
For many Australians still relying on petrol power, fuel-tracking apps are the easiest way to save hundreds and even lock in low prices for up to a week.
2 tbsp olive oil
On any given day, prices can vary by more than 50c a litre across cities. If you fill up an average 50-litre tank once a week, snaring a lower price can save you upwards of $1000 a year. And you don’t need to schlep across town burning more fuel to bag a bargain. On New Year’s Day in Sydney’s Wetherill Park, one station had a bowser price of $217.9, while just 3km down the road it was $162.9, according to PetrolSpy. The most popular fuel apps include PetrolSpy, Fuel Map Australia and My 7-Eleven (which allows you to lock in a fuel price at a nominated station for up to seven days).
Groceries Bundle phone and groceries: The major supermarkets offer discount mobile phone plans which come with a monthly grocery discount of 10 per cent on a single shop. With many plans around the $20 mark, it essentially works out to a free phone if you use the discount on a shop of $200 or more each month. Admittedly, many of these cheaper plans come with limited data, but if you don’t use much outside the home or it’s for teens (who you may want to restrict), it’s perfect. Become a multi-shopper: Supermarket competition is red hot with regular widespread discounting. Make the most of specials by shopping at precincts where the major players are co-located. Choice reports shoppers who multi-store shop say they save 20-40 per cent on their weekly bill. Get the right apps: Staying across what’s on special where can be a headache, but there’s a raft of apps to simplify saving. • Half-Price: Grocery Deals: This very popular app lists – as the name suggests – all items that are half price at Coles and Woolworths, including when the offers expire. It has more than 13,000 reviews and a 4.7-star rating. • Frugl: Instantly find the cheapest place to buy any produce with this pricecomparison site that scans Woolworths, Coles, IGA, Aldi and Drakes. You can search products by name, or by scanning the barcode of anything in your pantry. Added features allow users to filter for dietary requirements and share shopping lists.
2 shallots, chopped 1 leek, the white and pale green part chopped 3 cloves of garlic, chopped 1 small red chilli, chopped 200ml crème fraiche 1 lime, juiced Slice the kernels off the corn cobs and set aside. Cut or snap the bare cobs in half, place in a saucepan, cover with 700ml of water and bring them to the boil over a high heat. Reduce heat to a simmer and cook for 15 minutes. This becomes your stock. Heat the butter and olive oil in a large saucepan. Once foaming, add the chopped shallots and leek and season with salt. Cook gently for 10 minutes, until soft and starting to colour. Add the chopped garlic and chilli and cook for a further few minutes. Add in the corn kernels and stir to coat, cooking for a few more minutes. Strain the corn cob broth into the pot with the corn mixture. Add the crème fraiche and cook for about eight minutes until the corn is cooked. Season to taste with salt and pepper. Blitz the soup with a stick blender, but not completely – leave some of the kernels whole to provide a contrast in texture. Check the seasoning and add the lime juice. To serve, top with a drizzle of olive oil and if you’d like, an extra little dollop of crème fraiche.
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HAVEN MONEY
Congratulations to Cheryl for winning $1,000 by sharing her moment of connection with a perfect stranger. In our ever-accelerated lives, unexpected connections like Cheryl and Barbara’s are sweet little gifts. In October I took my daughter to Bondi Junction for a quick shopping trip and decided to have afternoon tea at Pattison’s Patisserie. They have a fine selection of desserts, and I couldn’t decide which one to choose! I started talking to a stranger beside me who was also struggling to decide on her dessert. She was an older lady, dressed impeccably in purple, and we talked about which ones we would like to try and laughed about putting on weight instantly just by looking at all the delicious desserts. She really made me laugh and we instantly connected. I ended up paying for her coffee and dessert and the owner said I was the nicest woman he had seen that day. I even took a photo with her and gave her a hug – a complete stranger who I’ll never forget from that moment in time. Her name is Barbara and I hope I bump into her again one day!
THE BORROWER’S DILEMMA
How much is too much? Securing a home loan offer is an exciting moment. A world of possibility opens up around that all-important number. And while no one wants to rain on the parade of eager house hunters, there’s a key question to address before falling in love with a property: Is there a difference between what you can borrow and what you should borrow? Only 10 per cent of borrowers take the maximum amount lenders are willing to offer, according to the Reserve Bank of Australia.1 So, despite burgeoning debt levels, we’re still a relatively sensible lot. However, this year, with economists speculating we’re at or near the top of the rate cycle, more borrowers may be tempted to extend themselves as they’re squeezed between rising prices and falling borrowing capacity. Since the RBA began hiking the target cash rate in May 2022, the amount average home buyers can borrow has fallen 30 per cent.2 That equates to a drop in purchasing power from $878,400 to just $600,300 for an average family of four, according to Rate City analysis. During the same period, the median home value in Australia has grown by 10 per cent to $762,000.3 Little wonder many borrowers may find themselves weighing up the pros and cons of taking on a larger loan to meet the market in 2024. Working out your financial comfort zone involves considering several factors.
UNDERSTAND HOW LOANS ARE ASSESSED No one – especially brokers and lenders – want to see borrowers in over their heads. The first step in deciding what size loan to take on is understanding how lenders assess it. Your broker will step you through this in detail, but in a nutshell, lenders deduct your living expenses and total debt repayments (including outstanding HECS debt repayments and ~3 per cent of credit card limits) from your income, with a buffer for potential interest rate rises.
1 Kearns, J, Interest Rates and the Property Market, speech to AFR Property Summit, 19 September 2022. 2 H annam, P, Australian property market may soon cool as rate hikes shrink borrowing capacity, The Guardian, 10 November, 2023. 3 PropTrak Home Price Index, www.proptrack.com.au/home-price-index
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CASE STUDY Aleisha and Michael Ipswich, Queensland
WHAT IS MORTGAGE STRESS? Mortgage stress is considered to kick in when home repayments total more than 30 per cent of a household’s pre-tax income. It’s not a hard and fast rule as many people on high incomes can still live comfortably at this ratio. But it’s a good indication of where things might start to get uncomfortable. Another way to look at things is debt-to-income ratio. The Australian Prudential Regulation Authority (APRA), the Government body that oversees the financial sector, considers loans more than six times household income to be risky.4
INTEREST RATES Pay attention to the rate cycle. No one has a crystal ball, but we do have history. With rates at historic lows in late 2020, most realised the only way was up. It was just the speed and scale of hikes that few predicted. To insulate against such shocks, APRA requires banks to use a serviceability buffer to stress-test loan applications. Since October 2021, the buffer has been set at three per cent. Home buyers borrowing at 6.5 per cent today would need to prove they can cover repayments at 9.5 per cent. Some argue this is too high, given a three per cent hike is very unlikely.
First-home buyer Aleisha admits Googling milliondollar homes, imagining what life could be like when she and her partner Michael were told they could qualify for a loan of up to $950,000 in 2020. “Who wouldn’t?’’ she says. “The thought of having our dream home first up; never having to move again.” It was tempting, but the 25-year-old thanks her lucky stars (and her economist mum) that she followed a lifelong habit of hoping for the best but planning for the worst. Rather than maxing out their borrowing, Aleisha and Michael opted for a much more conservative loan to buy a $440,000 four-bedroom, two-bathroom home in Ipswich, Queensland. At the time, the fixed interest rate on offer was 2.14 per cent and many thought low interest rates were here to stay. Not Aleisha. “I looked at historical interest rates and noticed they had a mean of about 7 per cent when you took out the major highs and lows. So, I thought, okay, the worst-case scenario is going to be 7 per cent. I want to make sure that if the interest rates do get to that level, we’ll still be comfortable. And if I’m overthinking it, well then at least we’re sitting pretty.”
Equally, others point out it has been too low in the past, as those assessed on the same three per cent buffer in late 2021 have since experienced rate rises totalling more than four per cent.
As it turned out, Aleisha’s war-gaming of interest rates was spot on, with the couple’s mortgage due to roll off at a rate of 7.85 per cent last year (although they were able to refinance to 5.7 per cent).
FUTURE FOCUS
Had they over-extended themselves, they may have been forced to sell, says Aleisha, something she has watched friends do as repayments skyrocketed.
Consider how much wriggle room you want to build in for unexpected (or even expected) events such as children, travel, education or job loss. Or if you see nothing but years of hard work, promotions and pay rises ahead, you may be comfortable borrowing towards the higher end of your capacity. While the bean counters will examine your finances, only you know what you need from life to live happily.
Although Aleisha and Michael don’t yet have their forever home, she’s glad they jumped into the market when they did. Within two months their house valuation had jumped $50,000 and now sits around $680,000.
4 APRA, APRA increases banks’ loan serviceability expectations to counter rising risks in home lending, www.apra.gov.au, 6 October 2021.
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