Breaking into the Australian property market is tough. But thinking beyond the traditional ways of owning property and pooling resources with another family, siblings, or friends could be a way to get a foot on the property ladder. Understanding the pros and cons of these arrangements and getting clear professional advice is essential to avoid complications down the track.
Why Consider Co-Ownership?
- Faster entry to the market: Pooling resources could help you save a deposit faster, qualify for a loan sooner, and enter the property market quicker than going it alone.
- Increased buying power: Combining incomes and savings could help you qualify for a larger loan, so you can afford a more desirable property/location.
- Reduced financial burden: Sharing the deposit, mortgage repayments, and ongoing costs like rates, insurance, and maintenance can lighten the load for each co-owner.
- Shared responsibilities: Property repairs and maintenance can be divided, reducing the workload and costs for everyone.
Understanding Ownership Structures: Joint Tenancy vs. Tenants in Common
The two primary legal structures for co-owning property in Australia are:
1. Joint Tenancy
- Equal shares: All owners hold an equal, undivided share of the entire property. You don’t own a specific “slice” but rather the whole property jointly with the others.
- Right of survivorship: The key feature of joint tenancy – if one joint tenant dies, their share automatically goes to the surviving joint tenant(s), regardless of what their Will might say.
- Common for couples: Joint tenancy is often chosen by spouses or de facto partners who intend for the property to pass directly to the survivor. If you’re not in a domestic relationship, however, the structure can be less flexible, as you cannot sell or transfer your individual “share” without the consent of the other joint tenant/s.
2. Tenants in Common
- Defined shares: Each owner holds a distinct and separate share of the property, which can be equal or unequal (e.g., one person owns 60%, the other 40%). These percentages usually reflect each party’s respective contributions.
- No right of survivorship: If a tenant in common dies, their share does not automatically go to the other co-owners. Instead, it forms part of their estate for distribution according to their Will, or if there is no Will, the rules of intestacy.
- Common for friends/siblings/business partners: Tenants in common is generally the preferred option for friends, siblings, or different families buying together. It offers more flexibility, allowing for differing contributions and more control over individual interests. Tenants in common can sell or transfer their individual share independently or bequeath it to a beneficiary in a Will.
Note: It is possible to have a mix, for example, if two couples are buying together, one couple could hold their 50% share as joint tenants (between themselves), while that 50% is held as tenants in common with the other couple’s 50%.
Key Considerations Before You Buy
Before you jump into a co-ownership arrangement, it’s important to have transparent discussions with all parties involved. Property co-ownership is a long-term financial partnership with some essential points to discuss, including:
- Shared goals: What is the purpose of the property? Is it a primary residence for all families, a holiday home, or an investment? How long do you intend to own it together? Do the long-term goals for each prospective co-owner align?
- Financial transparency: Everyone needs to be upfront about their financial situation, including income, debts, credit scores, and savings. This helps determine fair contributions to the deposit, mortgage, and ongoing expenses.
- Contributions and ownership shares: How will shares in the property be allocated? How will the initial deposit be split? Will everyone contribute equally to the mortgage and other costs, or will it be based on an agreed percentage that reflects different financial capacities?
- Decision-making: How will major decisions be made? This includes things like significant renovations, refinancing, or eventually selling the property. Will it require unanimous agreement, or will a majority rule?
- Use of the property: How will the property be used, especially if it’s a shared residence or a holiday home (e.g., usage schedules, guest rules).
- Exit strategy: What happens if a co-owner wants to sell their share, or if circumstances change (e.g., job loss, separation, death)? Having a clear plan for these scenarios is vital. An exit strategy should consider:
- one owner buying out another
- valuation methods for shares
- sale of the entire property
The Importance of a Co-ownership Agreement
The considerations above, and other contingencies, should be incorporated into a legally binding co-ownership agreement. A co-ownership agreement acts as a “rule book” for the co-owners. It sets out the rights, responsibilities, and obligations of all owners to ensure clarity regarding shares, contributions, maintenance and upkeep, property use, and exit strategies. Agreed dispute resolution processes such as mediation or arbitration should also be included, to avoid costly court battles.
Risks
While co-ownership can offer many benefits, there are potential risks. The obvious ones are:
- Joint liability for loans: Even if you have an agreement about splitting repayments, lenders typically hold all borrowers on a joint mortgage fully responsible for the entire loan. If one party can’t make their repayments, the others are legally liable to cover the shortfall.
- Relationship strain: Financial pressures and disagreements over property use or maintenance can strain personal relationships.
- Selling challenges: If one owner wants to sell their share, finding a new co-owner willing to buy into the existing arrangement can be complicated. If all parties need to agree to sell the entire property, disagreement could lead to a deadlock.
Key Takeaways
Property co-ownership with different families, family members, or other individuals can be a strategy for entering the property market or buying an investment. Careful planning and open communication are key to a successful co-ownership arrangement. Before signing anything, each co-owner should seek independent legal and financial advice.
This is general information only. Always seek professional advice before buying a property and entering a co-ownership arrangement. If you or someone you know wants more information or needs help or advice, please call (08) 8232 8446 or email [email protected].