Look before you leap - protecting your investment when buying with a friend

Look before you leap - protecting your investment when buying with a friend

With the average house price creeping towards R1, 000,000 more people, especially first-time buyers, are planning on sharing a mortgage with a friend, sibling or partner.

But, before making the leap, there are a few issues to consider in order to protect your investment, says Rhys Dyer, Chief Executive of ooba, South Africa's leading bond originator that places one in five South Africans in their homes

"It is important to remember that buying a property is a serious commitment, and while buyers may trust and like the person they are buying with, this shouldn¿t deter them from approaching the investment as they would any other financial transaction" warns Dyer.

Before rushing out to view properties the potential buying partners need to ensure their goals and finances are aligned and every aspect that is agreed upon must be covered in a contract. This will make future dealings far simpler as, hopefully, any possible conflicts have been discussed before they become an issue and the presence of a watertight contract will safeguard against any one party backing out at a later stage.

"It is imperative to discuss what both partners expect from the purchase of a property" says Dyer. "It would be difficult if your fundamental goals differ, such as if you would be prepared to renovate while your friend has no interest in paying for the additional costs, or if you see it as a short-term investment and your partner plans on keeping the property as a long-term investment."

The financial circumstances of both partners need to be discussed in full. "Make sure that you know and understand exactly where your partner stands in terms of their finances such as income, monthly expenses and savings and be prepared to do the same" says Dyer. "If your partner isn't happy to disclose this information, seriously reconsider entering into an agreement with him or her."

You should be prepared to have these meetings often, even after the property has been bought. "This will ensure that there are no surprises a few months, or even years, down the road," says Dyer.

Another important issue to discuss is an exit-strategy. It is more than likely that one or both buyers will consider selling the property due to changing circumstances such as marriage or job relocation.

"It is unlikely that friends buying together will live together for the rest of their lives, as typically joint-buyers tend to be younger people trying to get a leg-up on the property ladder," says Dyer. "From the outset an exit-strategy must be discussed and covered in a contract."

The contract should also cover other unexpected situations such as what happens to the property in the event of the death of one of the partners, if there is a fall-out or if one of the partners experiences financial difficulties.

Another issue to consider, and add to the contract, is the day-to-day financial concerns such as who will be responsible for the utility bills, insurance, the hidden cost of repairs and maintenance and who owns and pays for the furniture and appliances.

"Buyers should consider setting up a joint bank account to pay household bills," suggests Dyer. "This way the bills can be carefully monitored and any excess cash used to pay off the mortgage, used for renovations or paid back to the buyers at the end of a set period of time".

"If all possible situations are considered and outlined in a contract before the property is purchased it is far less likely to lead to conflict at a later stage and, more importantly, your investment will be protected" Dyer concludes.

Hello ooba news

When applying for a home loan, one of your most important considerations should be securing the lowest interest rate possible. And when the home loan is granted, you should do everything you can to reduce the term and the interest that you pay.

It came as some relief to homeowners when the prime interest rate was cut by 50 basis points to just 8.5% last month. Although this provides a welcome reduction in the monthly costs of repaying a mortgage, ooba, the South African home loan experts, say it would be wise for people to keep their repayment levels unchanged.

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If you're thinking about buying your first home, get your financial affairs in order as soon as possible. You need a clean credit record to secure a home loan. Unless you have a clean record of servicing debt, your bank will be unlikely to grant you a home loan.