Would you buy a house with a friend?

2012-08-04 15:12

Higher house prices and stricter lending criteria by banks have pushed the cost of owning a home out of reach for many ordinary South Africans on a single income. If you want to own a house, are you prepared to share the cost burden with a friend

You’ll have more buying power – but be careful, writes Liziwe Ndalana

Dieketseng Maleke wants to buy a house so that instead of renting and paying off somebody else’s bond, she’ll be paying off her own bond.

However, she has decided to buy a house with her friend as it is more affordable and will allow her to maintain her lifestyle.

“I wouldn’t qualify outright for a home loan. Even if I qualified, I would be broke by month end after my monthly payments and I don’t want that.

“I want to be able to maintain my current lifestyle and still have entertainment,” says Maleke, who is joining a growing trend of would-be homeowners who are entering into partnerships to buy a home after finding they have been priced out of the property market.

A recent salary survey by Careers24 found that the average salary in South Africa is R16 586 per month.

According to Absa’s house price index, the average price for a small house (80sqm - 140sqm) is R684 000.

Based on FNB’s online bond calculator, the repayments would be R8 480 per month. In order to qualify for that level of mortgage bond, you would
need to earn R28 268 before tax – which is 75% more than the average income.

In fact, on a salary of R16 586, a person would only qualify for a mortgage of R387 141. Therefore, for most South Africans, homeownership may only be possible by combining incomes.

While this may be a solution, it is a long-term commitment that can have serious financial implications should the partnership fail. One needs to think this through and carefully weigh up the consequences.

FNB Housing Finance CEO Marius Marais says the bank has handled several of these types of transactions. Although they remain relatively rare, the bank has never had an issue and all the deals have been successful so far.

However, he cautions that one should be careful before entering into such an arrangement.

“You need to be aware that you are both liable for the loan and should one party fail to make a payment and the bank decides to repossess the property, you will both suffer the consequences.

“You also need to understand that when you enter such an agreement, you are responsible for the total amount of the loan as you are jointly responsible for the bond”.

This means that if you decide to sell the property, you will both benefit from the profit made, even if the other party did not commit to and make regular payments.

If there is a default in payments you are both liable for the unpaid amount. If your partner cannot make them, the bank can claim the full payment from you.
Maleke says that to ensure the agreement is solid, they have decided to go to a lawyer who will draw up a contract.

“But I trust my friend because I have known her for a long time and she’s more like a sister to me. I have known her for 10 years.

“Trust is important when you go into an arrangement like this. I trust her because she knows about my personal problems as well and I know she won’t run away,” says Maleke.

Although Maleke’s friend is only on contract, while Maleke is permanently employed, Maleke is willing to take the risk because of their solid friendship.

She adds that she would be the principal bond holder in the agreement.

Salvatore Puglia, from Puglia Attorneys, says before entering into any agreement you must ensure that you have a strong relationship with the other person. Both of you should be able to repay the loan.

He advises that you need to sign a contract that will clearly state how the bond is going to be paid and what will happen in the event of one party dying or if the relationship falls out before the bond is paid off.

A contract, however, does not guarantee that the other party will honour the agreement.

A will is also important for this type of partnership. It must clearly be stated in the will what will happen to the property or dependants in the case of death.

Puglia says: “If the other party fails to honour his or her part of the agreement, parties can negotiate to sell the house in an open market in order to pay back the bank.

“However, if the bank makes a loss in the selling of the property, the bank will send summons to both parties.”

Puglia says this is irrespective of whether or not one party ­­­has honoured their part of the agreement.

According to Puglia, the contract will not necessarily protect you in case of litigation as the bank will not entertain personal disagreements that you may have, but will look at the bond that you signed jointly.

Marais says one of the bank’s requirements is that at least one party should live on the property.

He says it is also important that individuals take joint life cover that will cover their debt in the event of the death of one party.

The life cover should be equivalent to the loan amount.

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