Investing in Property with a Friend

Have you ever heard the expression, ‘no friends in business’? It’s an oldie but a goodie.

This is the attitude you should bring when considering buying property with a friend.

Many good friendships have gone under the bus, and lots of people have taken a bullet to their credit rating by not giving this decision adequate thought.

So, what are the risks involved with co-ownership, especially when you purchase with a friend?

What if one wants to sell?

One of the biggest problems with co-ownership is when one owner decides they want to sell the property, but the other owners don’t agree.

This often ends up in court, and the process can be costly and upsetting for everyone. And needless to say – the friendship probably won’t survive.

Buying could be harder in the future.

It might seem like the dream scenario to invest now with your best friend.

But if you decide in a few years to purchase a home to live in, the lender will assess your financial commitments based on the whole loan for the first property, not just the portion that you agreed to cover.

This could make it very difficult for you to get another loan.

You could be left holding the baby.

If something happens and your friend is unable to make their repayments, you could be left in the difficult situation of repaying the entire loan by yourself.

Coupled with your other living expenses, you might not be in a position to cover the whole amount yourself.

But there are some ways that you can reduce the risk, if you are keen to purchase property with a friend.

  1. Put a legal will in place. It’s important to make arrangements for what will happen to your assets if you pass away or become incapacitated.
  2. Draw up a co-ownership agreement. If you can think about any issues that might possibly come up in the future, and have an agreement in place to solve them, you’re less likely to wind up in court trying to work things out.
  3. Choose the right structure – tenants in common, or joint tenants. Tenants in common can own a different portion of the property, and they need to specify in their will who will inherit their portion if they die. Joint tenants jointly and equally own the property, and if one person dies, their share automatically goes to the other(s) regardless of the instructions in their will.
  4. Choose the right person. It’s important to discuss your financial goals and values before you enter into this sort of arrangement. You need to feel comfortable knowing that your friend will be financially secure enough to keep up their end of the bargain – otherwise you might be left trying to cover the repayments alone.

It’s important to think about your own relationships as well, if your partner is keen for you to buy a house together next year, you might want to think about how this first investment might impact your borrowing power.

 

Interest rates still on hold at record low of 1.5% as economy looks set to slow

Increases over the last week by the likes of Westpac and Suncorp were a factor in the RBA’s decision to leave official rates on hold for yet another month at 1.5 per cent. It marks the longest ever run of interest rate stability in Australia, with the last movement (a cut) happening back in August 2016.

During its last meeting on 7 August, the RBA board had examined an economy in generally good health, with steady growth in retail sales and employment, housing prices continuing to come off the boil (except in the booming Hobart market) and overall growth expected to sit just above 3 per cent in 2018 and 2019.

Of concern, though, is the ongoing drought gripping NSW and much of Queensland, which is impacting agriculture production and exports.

Inflation — a key driver of interest rate movements remains relatively subdued at 2.1 per cent and is expected to remain subdued for some time to come.

“Strong competitive pressures and low growth in wage costs had been placing downward pressure on retail prices for some time,” the board noted in its minutes.

The decision to keep rates on hold for yet another month had been widely anticipated, particularly since lenders have started hiking rates of their own accord, effectively blocking the RBA from doing so even if it had wanted to.

On Wednesday (29 August), Westpac became the first of the majors to raise rates, increasing all of its standard variable rates by 14 basis points. Suncorp followed suit two days later with a 17 basis point increase on variable home loans, and a 10 basis point rise on small business loans.

“There are plenty of factors keeping interest rates on hold, but top of mind is the fact that mortgage rates are already edging higher as lenders look to balance their profit margins against higher funding costs and a smaller deposit base,” noted Tim Lawless, head of research at property data firm CoreLogic.

“With the first of the big four banks announcing an out-of-cycle rate hike, the prospects for a higher cash rate have likely been pushed back even further; we could even see debate for a lower cash rate becoming more prominent.”

Likewise, it was unanimously expected by all 30 panellists from the finder.com.au RBA survey that official rates would remain on hold.

“The belief that the cash rate won’t budge combined with increased funding pressure from overseas has spurred Westpac, Suncorp and other major banks to hike mortgage rates out of cycle,” the comparison site’s insights manager, Graham Cooke, said.

“We expect this trend to continue, with the remaining of the big four and other lenders likely to follow suit in the coming days.”

 

 

Two Years with no Official Rate Change

The Reserve Bank of Australia has held the cash rate at its historic low of 1.5% for the 24th consecutive month. It is the longest period of interest rate stability on record.

The Bank’s central forecast for the Australian economy also remains unchanged with GDP growth expected to average a little over 3% in 2018 and 2019.

Read more

How do I decide between a fixed or variable interest loan?

Unsure about whether to lock down your interest rate for a period with a fixed rate home loan, or take your chances with a variable rate home loan?

It’s a decision everyone faces – from first-home buyers right through to investors – at various points in a loan’s life.

Read more

RBA keeps rates on hold at historic low of 1.5%

The Reserve Bank has left interest rates unchanged at the historic low of 1.5 % for the 20th consecutive meeting. The current holding pattern is the longest stretch without a move, with the RBA last changing rates with a 25 basis point cut in August 2016.

The decision was of little surprise, with the market pricing no chance of a move. RBA governor Philip Lowe maintained both the domestic and global economies were gaining strength.

Following a spate of stronger-than-expected data, economists have upgraded the consensus GDP growth forecast, to be released to tomorrow, to about 2.8 % year-on-year for the first quarter.

While increased government spending on infrastructure and a stronger contribution from the export sector had helped boost the RBA’s confidence, household spending remained a worry.

“Household income has been growing slowly and debt levels are high,” Dr Lowe said.

“Wages growth remains low. This is likely to continue for a while yet, although the stronger economy should see some lift in wages growth over time.”

The statement was largely unchanged, apart from acknowledging lending conditions were likely to tighten.

Alluding to the impact of the banking royal commission, Dr Lowe noted, “while there may be some further tightening of lending standards, the average mortgage interest rate on outstanding loans is continuing to decline.”

“We think there’s a real risk that tighter credit conditions could crimp GDP growth and contain price pressures,” Mr Dales said.

“That would mean the ‘progress in reducing unemployment and having inflation return to target’ would be even more ‘gradual’ than the RBA expects.”

Indeed.com economist Callum Pickering said raising rates would be particularly risky right now given house prices are falling steadily in both Sydney and Melbourne, geopolitical risks are ever present, and retail sales growth remains disappointing.

“The banking royal commission also raises the prospect of tighter lending conditions and out-of-cycle rate hikes by the major banks,” he said.

“The RBA may not need to tighten because the banks will do so independently.”

Reserve Bank keeps rates on hold for 19th consecutive month

The Reserve Bank has kept interest rates on hold at the historic low of 1.5 per cent for the 19th consecutive meeting.

Read more

Comparing commercial and residential property investment

If you are looking for a sound real estate investment, look beyond the typical two bedroom apartment and consider expanding your portfolio with a commercial property. There are three types of commercial property – office, retail and industrial.

There are some significant differences between investing in commercial and residential real estate, each with a potential positive or negative impact on your investment.

Read more

The banks bare all in internal memos

The ACCC’s interim report into residential mortgage pricing reveals the “lack of transparency” around how the ‘inquiry banks’ – ANZ, CBA, Macquarie, NAB and Westpac— make these decisions.

The regulator found a “lack of vigorous price competition” between the big four banks in particular, with negative public reaction being a major concern.

The ACCC examined thousands of internal documents for this report. This is what they reveal:

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The official cash rate remains at 1.5%. March 2018

This marks the 19th consecutive month the RBA has kept the rate steady since it cut the official cash rate by 25 basis points in August 2016.

The move was highly expected by many brokers and economists. More economists and banks are changing their forecasts of interest rate hike this year – from two to one or none.

Last month, ANZ abandoned its previous forecast of two interest rate increases this year, and now expects no rate hike at all.

“We no longer expect a rate hike in 2018, following the greater than expected emphasis on the mid-point of the inflation target band and increased comfort on financial stability risks in the RBA Governor’s speech on Thursday evening,” said ANZ’s head of Australian Economics, David Plank.

RBA Governor Philip Lowe said in a speech on 8 February that interest rates would have to start moving up if the economy makes further progress in reducing unemployment and in having inflation return to the midpoint of the target range.

From its forecast of two rate hikes this year, NAB now expects only one in late 2018, citing weak growth in wages and the slow progress in bringing down unemployment. 

“It is not impossible that the RBA stays on hold for all of 2018 and raises rates in early 2019,” said NAB chief economist Alan Oster last week.

Meanwhile, ABC Bullion expects the next move in rates to be a reduction. Its chief economist Jordan Eliseo said that while employment data, business conditions, and growth figures are solid, there seems no obvious catalyst to turn around the record low wage growth. He also expects a slowing property market to weigh on confidence.

 

Want to help your kids buy property

The real estate market can be tough for young adults, but as a parent you may be able to lend a helping hand. We tell you how.

  1. Parent-to-child loan

A parent-to-child loan is when a parent lends their child money. This is a formal, legally binding arrangement, administered by an independent third party. At the start of the loan period, both parties agree to terms including repayment amounts, a schedule and a process to manage defaults.

  • Benefits: You can set generous terms for your child, but your assets, savings and credit rating are somewhat protected as you are not the borrower.
  • Drawbacks: There are legal implications for your child if they have a spouse and the relationship breaks down, in that the spouse could try to claim some of the loan proceeds as an asset of the relationship to which they are entitled. There are also tax considerations for both parties.
  1. Family guarantee

If your child doesn’t have enough security for a mortgage, you could provide a family guarantee. This is where you use some of the equity in your own home as part of the security. For example, your equity might cover 20% of the security, and your child’s new property would be the other 80%. It’s also known as a guarantor loan.

This can be a temporary arrangement until your child has paid down the loan to an acceptable level.

  • Benefits: You have the option of guaranteeing only a portion of the loan.
  • Drawbacks: If your child defaults, your assets are at risk.
  1. Becoming a co-applicant

You can help your child secure a loan if you sign on as a co-applicant. This means you’re equally as responsible as your child for meeting repayments. The lender will consider your assets in its borrower’s assessment.

  • Benefits: Your child can obtain a loan with a low income.
  • Drawbacks: If your child stops making repayments, you’re responsible for making them. If you can’t make the repayments, it will affect your credit rating.
  1. Gift

When you give your child money but don’t expect it to be repaid, it’s considered a gift. You may need to sign a statement to say it’s a gift, not a loan.

  • Benefits: You can provide financial help, possibly without the legal, tax or financial implications of a formal arrangement.
  • Drawbacks: If your child has a spouse and their relationship breaks down, the former partner could make a claim for the property.
  1. Assistance in kind

If you’re risk averse, consider providing assistance in kind; that is, covering some of the expenses that come along with buying a property. You could pay for services such as a property survey or conveyancing fees, or help with stamp duty.

  • Benefits: You can give practical financial assistance.
  • Drawbacks: The amount of money you provide may be more than what your child ends up spending. For example, you might want to contribute $20,000 but the services cost $15,000. In this case, the rest of the amount is subject to the terms of a gift or loan.

Make sure you’re well informed about your options when giving or lending money so you can remain in the best position to help your child become a home owner. You can contact your mortgage broker to discuss the right financial arrangement for your family.

 

– Loan Hub