Whether you’re converting a property you own or buying property to develop in conjunction with other households, you’ll most likely need to secure finance.
Home loan or development finance?
This is one of the first questions that needs to be addressed. Development finance is structured differently to a home loan, with less favourable equity (deposit) requirements and interest charges. It will be required if the bank views the project as a ‘development’ so you’ll need to talk to your bank first. As one bank described it, “if it’s a granny flat or similar type of development that’s all related to the one family, it’s a home loan. But if it’s separate homes to be sold off on separate titles, it’s a development”. Given collaborative housing is an emerging model, different lenders may take slightly different views. For more on development finance see financing larger projects.
When a single party is the owner
If you’re a single party borrowing to finance the whole project with the intention of renting out or later selling portions, first check whether a home loan or development finance applies. The lending criteria may be affected if the lender considers the home improvements too unconventional, if each unit is self contained this is less likely. Applying separate titles to each unit could be considered a positive in the case of conventional titles like Torrens or Strata, but lending criteria may be stricter for less conventional titles like Company. Seek tailored financial and legal advice.
Mortgage brokers are a good place to start as they have the knowledge and contacts to connect you with lenders that might suit your situation. Look for brokers that are members of the Mortgage & Finance Association of Australia or the Finance Brokers Association of Australia.
Buying property together
If you're several households are taking out the finance for property on a single title, you could purchase as tenants in common and use a co-borrower loan option. This method allows you to purchase a property together but keep your finances separate. You’ll have to guarantee each other’s loans and for protection you’ll need a tailored co-ownership agreement. It’s imperative to seek expert legal and financial advice tailored to your situation.
Buying into someone else’s property
The process will vary depending on how the property is titled and each party will need to seek expert financial and legal advice. If the property will be shared on a single title the easiest route is probably ownership as tenants in common. The property’s certificate of title needs to be updated to note the interests of the co-owners and their respective proportions of ownership. As for buying property together, you’ll need a legal co-ownership agreement.
Co-borrower home loans
This type of home loan allows different parties to purchase a property together but keep their finances separate. Each party takes out a separate home loan with a separate deposit and repayments, but the loans are secured against the same property and each party must guarantee the other’s loans. You’ll need a co-ownership agreement and insurance to qualify. Also see ASIC’s advice on co-borrowing with family and friends.
A co-ownership agreement is a legal document which sets out each party’s rights and obligations,
including what happens when someone wants to sell or defaults on their mortgage repayments. It can also be used to set out how you want to deal with other issues related to the property. You’ll need one tailored to your situation.
Next>> Know the legalities