Thinking of property co-ownership? Go in with your eyes open
Today’s ever-increasing house prices across Australia have left a generation of Australians feeling like owing their own home will only every be a pipe dream. As a result, the concept of property co-ownership is becoming more and more popular, particularly with generations X and Y.
What is property co-ownership?
Property co-ownership involves two or more people combining finances to pay the deposit and mortgage on a property. Some people use co-ownership as an option for purchasing an investment property while others use it to buy a home to live in, with them effectively paying ‘rent’ to the other party.
The parties generally hold the property as ‘Tenants in Common’, holding a percentage share of the property (the share, usually determined by the contribution each party has invested).
Whether you are entering into the arrangement with your parents, siblings, friends or business associates, to live in or purely as an investment, it’s important to consider the pro’s and con’s.
• You share the cost of purchasing the property, maintenance and renovation costs
• You have a greater choice of potential investments with more money to invest in; and
• You can repay a mortgage in a shorter time.
• Parties are usually jointly and severally liable for debts – so if one party defaults on a payment, the other party will be liable
• Things can go pear shape – the economy can go downhill, people lose their job or fall ill – then what happens?
• You end up selling a time you don’t want to due to the other party’s financial situation changing
• Additional costs in setting up a co-ownership agreement
• There may be additional costs if you want to leave the agreement early; and
• The relationship may break down.
Disputes between co-owners can and do regularly occur. For this reason, we recommend parties enter into a formal co-ownership agreement which sets out the rights and obligations of each of the owners for such things as home loan structure, liability/process if the other defaults on payments, if one party wants to sell the house, buying out the other party, renting, home loan refinancing and rate review process, property maintenance and costs, and actions if one party wants to borrow against the property to draw down on equity for other purposes.
In short, there are a number of risks associated with co-ownership which can very quickly escalate and destroy the closest of relationships. Clear communication of expectations at the outset and knowing the person you are entering into the agreement with, are critical factors to co-ownership success.