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Risks flagged over co-borrowing arrangement

Prospective home buyers have been cautioned against hastily entering relationship-based borrowing arrangements to secure a mortgage amid an improvement in housing affordability.

The COVID-19 crisis has triggered a second wave of reductions in residential property prices, which, according to CoreLogic, slipped 0.4 per cent in May – the first monthly decline since June 2019.

Analysts are forecasting property price reductions of between 5 to 10 per cent throughout 2020 and into 2021.

According to Fiona Reid, managing director of Reid Family Lawyers, price falls may spur demand for housing as affordability pressures abate.

However, Ms Reid has urged prospective home buyers considering co-borrowing arrangements to carefully consider risks associated with relationship-based financial partnerships.

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“Buying a property with a family member or friend can be a good way to get into the property market. However, Australians must be wary of the risks involved from a family law perspective,” she said.

“Often, for example, couples are ‘gifted’ funds by a parent to assist them to get into the property market. If the relationship ends, the ‘gift’, more often than not, suddenly morphs into a ‘loan’, which gives rise to added complexities in your family law dispute.”

Ms Reid recommended that borrowers entering co-borrowing arrangements “clearly document” their agreements.  

“If the money is intended to be repaid if the relationship ends, this should be set out in an agreement. There is also the option of registering the ‘loan’ (assuming it is to be repaid) on the title of the property. 

“Further, if you own a property with someone else, either a family member or otherwise, and one of you ends up in family law proceedings, that person’s share in the property goes in as an asset of the relationship.

“This means that the other owner may well be drawn into a family law dispute in which they otherwise wouldn’t have any interest.” 

Ms Reid also stressed that co-borrowers should understand their ownership rights, assess their liability in the event of a default, and agree to contractual terms prior to a financial commitment.

[Related: Home buying sentiment stabilises following COVID drag]

Risks flagged over co-borrowing arrangement
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