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Financing Your Cohouse

Posted by Anthony Kidd | 8 September 2010

To buy a house in a cohousing community you need money. Cold, hard cash. A person selling a house wants to get a fair price. That means the buyer must pay a fair price.

 

In Australia it is very difficult to buy in to an existing cohousing neighbourhoods. To do so would mean waiting for a house to come up for sale at Pinakarri or Cascade Cohousing. There are no other options. If you want to live in cohousing in Melbourne, Sydney or any where else to only option is to join one of the groups looking to build. To do this you also need money. These groups will buy land, build on it and create their communities. To do that they need money.

 

To participate in the building of a cohousing neighbourhood you need roughly as much money as you would need to buy a similar house in the area you are looking at. In Melbourne that means you must be able to come up with between $500,000 and $1 million, depending on the size and location of the house you want.

 

Most people don’t have $500,000 sitting in the bank. They will need to borrow to finance their purchase which is fine as long as they have the income to service the loan. This is the dark art of turning income into capital which is quite poorly understood. It is amazing how many people, even those with mortgages, do not understand how these loans work.

 

Housing Loans

Home loans or housing loans are offered by banks and non-bank lenders to people with the income to service the loan. As part of the deal they take a mortgage over the land and if the loan is not paid they foreclose which means to take the land and sell it. The repayments on a loan are a function of the value of the loan at the beginning (the principle), the term of the loan and the interest rate.

 

Let’s put some figures in to make it real. Let’s say you want to buy a $600,000 house in a cohousing neighbourhood. You have $100,000 so you need to borrow $500,000. The maximum term of these loans is usually 30 years. The repayments on this loan will be around $3330. Don’t worry too much about how I calculated the repayments at this stage.

 

Lets assume the bank charges 7% interest per year. In the first month the interest will be 7% divided by 12 times $500,000 which is 2916. From our repayment of $3,330, $2,926 goes to pay interest and there is $413 left to pay off the principle. At the start of the second month you owe $499, 587. The interest on this amount is $2,914 leaving $415 to pay off the principle. At the end of this month you owe $99,171. This process goes on for 30 years until the loan is paid back. As you can see from this example, the amount of interest paid reduces as the principle reduces. In the first year you pay $34,837 in interest and 5,122 off the principle. In the second year the interest reduces to $34,467 and the principle increases to $5,493. Each year after that you pay off more of the principle and less interest.

 

Generally, banks will lend people money providing the repayments do not exceed 40% of their gross income. In our example the repayments are $3,330 per month and so to borrow that amount our borrower would need a gross income of $8,325 per month or $99,900 per year.

 

Individual Finances in Cohousing

When forming a cohousing group a finance committee is established to look at financial matters. This committee looks at the finances of buying land and building on it as well as how the individual members will finance their purchase. In this article we are concerned with the second of these functions. There are different ways to help people through the process. It could be done with a survey but I find that impersonal and there is the difficulty of processing all that information. It is also more difficult to make sure personal financial information is not disclosed to anyone else. There is also the problem that people may not understand the questions on the form.

 

I think the best way to manage this is to conduct financial interviews with each member of the group. The finance committee meets with each member to discuss their assets and income. From this discussion the committee will be able to determine what the member can afford. The committee will have previously estimated what a unit in the development is likely to cost and at the end of the interview will be able to tell the member whether or not they are able to afford to continue.

 

It is important that the information gathered by the finance committee is kept confidential. People are very protective of their financial information and it may harm their salary negotiations or other business interests if this information leaks out. Most people will not be willing to reveal this sort of information to the group as a whole and to reveal it will result in some upset members and probably the loss of some good members.

 

Those who can’t afford to buy can continue to be part of the group but must do so as renters rather than buyers. This means they will participate in community building but will not be able to make financial decisions. To let those without money to participate in these decisions will skew the result and destabilize the decision. The decision will be destabilized because those committing the funds may not be satisfied that all those making the decision.

 

The renters must then look for an investor to buy a unit they can rent. These could be private investors, including other members of the group, or could be a housing provider. If the renter qualifies for community housing it might be possible to convince a housing association to buy some of the units and rent it to members. For further information about housing providers see http://www.housingregistrar.vic.gov.au/registered-housing-sector/housing-providers.