How Does a Group Mortgage Work?
Did you know that house prices in New Zealand are now 8 times the average annual household income?
This staggering reality has led to a surge in group mortgage applications, as more Kiwis team up to enter the property market. Whether you’re first home buyers joining forces with friends or families embracing multi-generational living, combining resources could be your ticket to homeownership.
In this week’s update, I’ll walk you through everything you need to know about group mortgages - from choosing the right co-buyers to setting up legal structures and managing shared living arrangements. Let’s explore how you can make property co-ownership work for you.
Understanding Group Mortgages
Group mortgages are becoming a practical solution for many New Zealanders facing housing affordability challenges. As property prices continue to climb, pooling resources offers a viable path to homeownership. Let’s explore how these arrangements work:
What is a Group Mortgage?
A group mortgage is a home loan arrangement where multiple individuals collectively apply for and share responsibility for a single mortgage to purchase a property together. Essentially, it allows a “borrowing party” consisting of multiple people to combine their financial resources.
Group mortgages can be structured in different ways:
With a group mortgage, the property serves as security for the loan, and all borrowers share the rights, responsibilities, and risks associated with homeownership. The key distinction from individual mortgages is that all parties are “jointly and severally liable” for the loan - meaning each person remains responsible for the entire debt even if others cannot pay their share.
Who can apply together?
Group mortgages are remarkably flexible in terms of who can apply together. Eligible co-borrowers may include:
When evaluating group applications, lenders assess the combined income, expenses, and credit histories of all applicants. This collective approach can potentially increase borrowing capacity, making otherwise unaffordable properties accessible.
Why Group Mortgages Are Gaining Popularity
Group mortgages have seen significant growth in popularity due to several compelling factors. The main one, being the affordability challenges in New Zealand’s housing market.
By teaming up, co-buyers can pool their savings to accumulate a deposit faster and leverage their combined incomes to qualify for larger loans.
Another factor driving group mortgage popularity is the changing mortgage distribution landscape. Since 2019, Mortgage Advisers have increased their market share from less than 40% to around 60%. A Mortgage Adviser can help prospective buyers explore alternative arrangements like group mortgages that might not be actively promoted by traditional banking channels.
Furthermore, the practical benefits extend beyond the initial purchase. Co-owners can share ongoing costs such as bills, rates, insurance, and maintenance, making homeownership more sustainable long-term. For some, co-ownership also presents a stepping stone - allowing entry to the property market with the intention of eventually buying out co-owners or using the equity to purchase independently in the future.
Nevertheless, despite their advantages, group mortgages require careful consideration. The shared liability means each borrower remains responsible for the entire loan if others default. Additionally, some lenders may be hesitant about lending to friend groups, making Mortgage Adviser assistance particularly valuable.
Planning Your Group Purchase
Successful group property purchases begin with meticulous planning. Before applying for a group mortgage, you’ll need to thoroughly prepare to ensure a smooth co-ownership experience.
Choosing The Right Co-Buyers
Teaming up with the right people forms the foundation of successful property co-ownership. Primarily, select co-buyers you genuinely trust and feel comfortable sharing financial information with. Go into it with people you trust, and have open and honest conversations with one another early on.
When selecting potential co-owners, consider:
Many successful co-ownership arrangements occur between siblings, close friends, or couples teaming up with other couples. While friendship is important, financial compatibility ultimately matters most when entering a significant financial commitment together.
Setting Shared Goals and Expectations
Once you’ve identified potential co-buyers, establishing clear shared goals becomes important. Different co-owners may have varied motivations - some first home buyers might view this as a stepping stone to independent ownership, while others might plan for multi-generational living arrangements.
Discuss and document your collective vision for the property. This includes how long everyone intends to stay, whether the property is primarily an investment or a home, and potential scenarios like relationship changes or career relocations.
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It pays to have open discussions around what happens if circumstances change. Consider questions like: What if someone wants to move out? How will maintenance decisions be made? What happens if someone can’t make their repayments?
Addressing these scenarios upfront prevents misunderstandings later. Having those challenging conversations can help ensure you’re all on the same page before commencing the co-own journey.
Discussing Financial Contributions Early
Money conversations might feel uncomfortable but are absolutely necessary for group mortgage applications. Be transparent about what each person can contribute toward:
Each co-owner’s contribution doesn’t necessarily need to be equal - some arrangements work with proportional ownership based on financial input. Nevertheless, understanding that all co-owners will be “individually and together liable for the entire mortgage” is critical.
Consider working together with a Mortgage Adviser to assess each person’s borrowing capacity. This way you can obtain a pre-approval which will help determine collective borrowing power before the property hunt begins.
Remember that financial contributions extend beyond the purchase. Create a system for handling ongoing expenses, possibly through a shared account for property-related costs. Furthermore, discuss how equity will be divided if the property increases in value over time.
Property co-ownership works best when these financial conversations happen before any paperwork is signed or applications are submitted.
Creating a Co-ownership Agreement
While not legally mandatory, a property sharing agreement (also called a co-ownership agreement) is strongly recommended for group mortgages. Many banks actually require this document before lending to a group.
A comprehensive property sharing agreement should address:
Splitting Repayments and Bills
Managing shared expenses in group mortgages requires careful organisation. Most banks offer split loan options where the mortgage is issued as one loan against the property but divided into parts. This structure allows each owner to manage their portion differently - some might choose fixed rates while others prefer floating options.
Your Mortgage Adviser will help you to determine the best loan structure for your co-ownership arrangement. Things like how to split the loan, repayment terms, payment frequency and of course your home insurance needs.
For day-to-day expenses, establish a dedicated account for property-related costs. This approach simplifies tracking contributions and ensures bills are paid promptly. Consider automatic payments timed with income deposits to prevent missed payments.
Conclusion
Co-owning a home offers a unique opportunity for home buyers to overcome the challenges of saving for a deposit and meeting affordability criteria. By teaming up with friends or family members, you can pool your resources and share the responsibilities of homeownership.
However, Co-ownership comes with its own set of considerations and risks. It's important to have open and honest conversations, seek professional advice, establish clear expectations and legal agreements before embarking on a Co-owning journey.
With careful planning and collaboration, co-owning a home can be a viable and rewarding path to achieving homeownership.
Ready to Take the Next Step?
As a group, it's best to consult with a Mortgage Adviser who can guide you through the application process and help you understand the financial implications of co-ownership.
Feel free to book a free consultation with me to see how a group mortgage could work for you!
Cheers, Simon 📲 021 322 109