Whether you're looking for a cheaper way to enter the property market or a less risky way to start your investing career, buying a property with someone else is becoming the answer for many Aussies.
The decision to enter into a co-ownership arrangement is a big one that has quite a few implications. There are some desirable benefits that make co-ownership attractive.
By pooling money for a deposit, you might be able to afford a much more valuable property or have a significantly larger deposit to avoid paying Lenders Mortgage Insurance (LMI). If you are buying an investment property, a larger deposit could be the difference between a negatively geared and positively geared property. It also makes property ownership more affordable; rates are halved, mortgage repayments are split and ongoing repairs, maintenance and renovations are divided between the owners.
On the other hand, property co-ownership can really test relationships and put your finances at risk. Property commentator and director of Metropole Property Strategists, Michael Yardney, cautions against co-ownership, “It is better to own the whole of a small thing than part of a larger when it goes sour. Having said that, it has worked for me in the past. I got into the property market in the 1970’s because I partnered with my parents. In the 1980’s and 90’s, I managed to be part of some very significant property developments by choosing the right venture partners who brought complimentary skills to the table. And I am now in the position to help my children get into property by partnering with them. It can work, but as with any property investment endeavour, the success is in the planning.”
- Michael is one of Australia's leading property investment advisors.
- He is the director of Metropole Property Strategists.
- 70,000 people have subscribed to his blog 'Property Investment Update'.
So who should you co-own with?
Successful co-owner relationships have worked between siblings, friends, business partners, work colleagues or de facto spouses but they don’t always last. According to Yardney, you should choose a person who has a similar mindset and the same goals for the property. “My rule of thumb is best said by Groucho Marx, ‘I refuse to join any club who would have me as a member.’ The relationship should be mutually beneficial and based on complementary skills. If the other party needs you then be very cautious.”
According to Kim Narayan, owner and operator of Mortgage Choice Parramatta, “Most of the co-borrowers I see are friends, but family has more of a chance of succeeding.” Yardney agrees: “It is usually better with family as opposed to friends because you tend to sort your relationships out and you know their financial circumstances. Be warned though, family is much more important than money.”
- Kim is the owner of Mortgage Choice Parramatta.
- She has over seven years of experience as a mortgage broker.
- She also has a range of experience which is helpful to first home buyers, investors and many others.
Becoming a co-owner
You have the perfect person in mind to enter into a co-ownership arrangement with, so what are the steps involved in making it happen? It isn’t as simple as just choosing a house. There are some important considerations that need to be taken into account first to protect yourself and your relationship.
Get it in writing
Each person entering into a co-ownership agreement needs to seek independent legal advice. Michael Yardney recommends clearly defining and documenting every role and expectation. “It is vital that all partners agree on the goals, responsibilities, financial contribution, profit distribution, and time frame as well as the borrowing, legal and taxation implications before buying a property.”
Legal advice may be necessary to determine the most appropriate ownership structure; the two main options are joint tenants or tenants in common.
Joint tenants own the property together but as individuals, they own nothing. This means that if one party dies their share is automatically transferred to the remaining owner.
In contrast, tenants in common can own a predetermined portion of the property and if they die they transfer their share to their own choice of beneficiary instead of the other co-owners. It is a more popular option for co-owners but it is recommended that tenants in common have a co-ownership agreement in place.
A co-ownership agreement is a legal document that sets out the rights and obligations of each person with a share in the property. It should include a dispute resolution clause, the proposed exit strategy and a financial default plan. PodProperty are an online business who specialise in co-ownership agreements for people who buy as tenants in common and are recommended by many leading lenders including Commonwealth Bank. For $350 per co-owner, you can ensure all parties are on the same page and that inevitable disputes about whether to sell, refinance, buy a party out as well as repayment issues are settled in accordance with the contract that all parties have signed.
Sort out the financials
“It is important to have the honest conversation about finances up front,” says Yardney. Things to discuss include your share of ownership, your financial background and repayment capacity. A 50/50 split in ownership is not always the best option; it is quite acceptable for there to be a 30/70 split or even a 33/33/33 split as long as it is specified on the mortgage documents.
According to Kim Narayan of Mortgage Choice, “A common reason for people buying as co-owners is that one party has a deposit and the other party has the consistent income to get approved for a loan so they team up.”
In your discussion of finances you may come across a few potential road blocks but working with a mortgage broker before you even start looking for a property can help you know exactly what your borrowing capacity is as a team.
If your partner has bad credit, you are not necessarily out of luck. “The first thing you need to do is get a credit check,” says Narayan. “A broker can access your Equifax report within 24 hours. Most defaults occur because people have moved address. If the default is under $500 and it is a telco or electricity bill that is noted as paid, you can still be accepted if you include a letter stating the reason for the default.”
Another situation that needs to be clarified is your taxable income, especially if one party is self-employed. “It is quite common that an applicant thinks their taxable income is one amount but the lender sees it as a different amount. If you are self-employed you will need to include two years of company and personal tax returns plus all financials so the broker can present an accurate amount to the lenders.” Narayan explained.
It is common for co-owner applicants to use equity from their own property to contribute as their portion of the deposit. Narayan cautions against cross collateralisation. “It is critical to keep your personal assets separate to your new loan application. Go to your own lender first, get an increase on your mortgage, and then use that as a cash contribution towards the new property. Being co-owners means you are jointly and severably liable. Therefore, if one party can’t pay their portion, the responsibility falls on the other party. You don’t want your personal home mixed up in that.”
When looking for the best home loan, there are an increasing number of lenders who are willing to work with co-borrowers. Narayan says there aren’t really any differences from a normal loan but they can be structured so each person knows their own liability.
She recommends split loans for co-owners. “This means the one loan will be split depending on the portion you are liable for. You can’t usually get two separate loans with different lenders because there is one security on the loan but a split loan is a good option. Each split will still have both names on it but it makes the responsibility and liability very clear.”
For co-borrowers entering a loan as investors, Narayan usually insists on an interest-only loan with an offset account. There are even some lenders who provide two offset accounts so each party can manage their own liability.
Choose a property
Now that each party knows exactly where they stand and you have a water-tight co-ownership agreement in place, it is time to find a property to buy. This is a ripe opportunity for disagreements so consider your options. You could nominate one co-owner to be in charge of this task or you could use a buyers agent. This can help keep the emotion out of the decision and limit the opportunity for disagreements. A buyers’ agent will work with your goals and within your parameters to come up with a short list of suitable properties.
A few last considerations
The ‘jointly and severably liable’ clause has major implications in a co-ownership arrangement so keep these last few considerations in mind:
- What if you enter into a co-ownership agreement as a single and then later find a person you want to settle down with and buy your own house with?
- Co-owning a property can restrict your future borrowing power. Even though you might only own a 30% share of the property, a lender will most likely see you as liable for the entire property debt and may limit how much you can borrow for a different purpose.
- What if you went in to the property co-ownership when you were married but now you are getting a divorce and need to liquidate your assets?
- If you have financially viable partners they might try to buy out your share of the property. This is a neat and tidy answer but real life can be messy. Your co-ownership agreement should outline exactly what your options are in this circumstance.
- What happens if you get sick or are suddenly out of work and can’t meet your share of the repayments?
- Again, your co-ownership agreement will come into play. It should have a financial default plan. Protect yourself with life and income protection insurance to avoid this issue and prevent putting the pressure on your partner or partners.
In conclusion, co-ownership is a big decision and commitment. Do your due diligence in screening your partner, discussing all finances and getting a water-tight co-ownership agreement in place before moving forward. Making the most of expert advice from a lawyer, mortgage broker and buyers agent will help to ensure a successful co-ownership experience.