Co-ownership is one way young Australian singles are able to buy property as house prices continue to rise in most parts of the country. Buying your own home is a dream that is fast becoming unattainable for young Australians, especially those who are single. While couples traditionally pool their incomes and resources in order to afford to buy a home, a single relying on one income and one savings account can mean that getting on the property ladder is almost impossible.
That’s why many young singles are turning to co-ownership in order to buy a property, choosing to purchase a home with a family member or friend.
According to Daniel Cohen, co-founder of First Home Buyers Australia, co-purchasing is an increasing trend, particularly among first home buyers.
“We believe there are two key drivers behind the increase in co-purchasing. Firstly, housing affordability. The hardest part of being a first home buyer is putting a deposit together. By co-purchasing, you are pooling together multiple people’s savings which boosts the overall deposit position.
“Secondly, the trend is people are getting married later in life. Most people in Australia don’t purchase a property on their own. So if they have no life partner, they may consider siblings and friends to help achieve an investment property.”
Jessica Darnbrough, national spokeswoman for Mortgage Choice says they’ve seen a 6 per cent jump in siblings buying together since 2013, making up around 6.5 per cent of their mortgage holders. She says there are several reasons for this, including the increase in borrowing capacity with two incomes, as well as being able to combine savings to come up with a higher deposit, possibly avoiding expensive mortgage insurance.
Andre and his brother decided to invest together after they had both been through a divorce and had to sell their properties as part of the process. “As we both had divorce settlement funds, we decided to combine that money to allow us to afford a larger house in an inner-city area of Sydney,” he said.
“We have family in this area and did not want to have to move further out. On our own this wouldn’t have been possible.”
Andre says while the arrangement has been beneficial for the like-minded brothers, it hasn’t been without some bumps in the road. Bills and expenses have needed to be managed closely to ensure fairness, as Andre says it has become messy at times, and renovations or major purchases must be agreed on to avoid further conflict.
He says, however, the biggest challenge is yet to come when one of the brothers decides to move out and settle down again with a new partner. “This will be difficult as it will most likely require the sale of the property in order to make it fair.”
Co-ownership of property can be fraught with potential problems down the track, so it’s important for purchasers to prepare for contingencies before proceeding.
“Before any purchase agreement is signed or exchanged all prospective investors need to take legal and accounting advice on how the property should be owned, in what proportions/shares and whether spouses will be part of the deal,” says solicitor and property law expert Tim O’Dwyer. “Apart from buying as joint tenants, tenants in common or in combinations of those types of holdings, you might be best advised to have a company (or companies) acquire the property and/or involve family or other trust arrangements.”
Regardless of the buying arrangement, it’s crucial to have a legally-binding document which sets out how the investment will be managed and funded by and between the investors, as well as making provision for disputes, deaths, divorces, dispositions, disposals and “dismemberments”.
“In the case of an investment property (residential, commercial, industrial or a site to be developed), you must first know as much as you can personally and financially about your proposed co-owner/s and really trust them. Consider family before friends, and be most wary of strangers asking you to participate in a wealth-creating project.”
What Should A Co-Ownership Agreement Include?
A co-ownership agreement drawn up to address questions like:
What happens to the property if the relationship sours?
What happens if one party wants to sell or move overseas?
Are both owners going to live in the property?
Will rent be paid if just one owner lives there?
Will you get tenants in?
Who will pay the bills?
It really is a cornerstone legal document for your investment because it will set out roles and responsibilities of each owner and it will deal with the other important issues. A co-ownership agreement also helps parties to discuss and clearly understand their goals in terms of price and location, as well as their overall investment strategy.
Co-Ownership: Purchase Structure
You’ll need to decide whether to purchase the property under a Joint Tenants or Tenants in Common co-ownership structure. The differences are a vital consideration.
Tenants in common
Tenants in common is where each person has a share of the property and together they make up the ownership of the whole of the property. There can be any number of owners and the shares need not be equal. For example, two people can purchase a property for $600,000 with one person putting up $400,000 (thus owning a share of two thirds) and the other $200,000 (representing a one-third share). Or three people could put in $200,000 each and have equal shares of one third a piece.
The shares are a measure of the amounts of money contributed by the co-owners in the purchase and is usually used by people buying investment property. It’s also a popular choice for people who re-marry after having children from an earlier relationship as they’re able to will their share of the property to their respective children.
• all tenants in common are entitled to physical possession of the whole property
• each tenant in common is required to state, in their will, who may inherit their share of the property
• tenants in common can acquire their interests (in the property) at different times and from different people
• each tenant in common is free to sell or otherwise deal with their interest in the property at anytime (unless there’s in place a co-ownership agreement which contains terms restricting this)
• the interest in the land of each tenant in common is separate and distinct from the other
Joint tenants own the property jointly and equally – and there can be more than two owners – and don’t hold proportionate shares of the property.
Each has a right shared with the others to the whole property but no individual right to any particular share in it.
The right of survivorship is an essential and necessary characteristic of joint tenancy. On the death of one joint tenant, the surviving joint tenant(s) will split the shares equally. If there’s only one other tenant, they’ll inherit the whole share. This is regardless of what may be stipulated in the deceased person’s will.
• it’s usual for married and long-term de facto couples to own property in this manner, as it’s often their wish that their share of the property goes to their partner.
• in dealing with third parties such as a mortgagee, joint tenants must act as a single owner
• joint tenants must acquire the property at the same time from the same person
• all joint tenants are entitled to physical possession of the whole property
• each joint tenant can only act at the same time as the other(s)
• you should still consider the impact on your overall asset position, from an estate-planning perspective
The Risks of Co-Ownership
Here are two of the most common risks:
Future home loan affordability is affected. Having responsibility for a loan jointly with others may make it harder to get a future loan for another property as affordability is assessed on an individual’s income. If one co-owner wants to buy a second property, the bank will take into account that first loan – but they’ll assess the whole loan as that borrower’s responsibility.
One owner wants to sell up. Problems can also arise if one co-owner wants to sell when the others don’t and you may end up in court which can be expensive and stressful.
Responsibility fort the mortgage. If the loan document has been signed by all co-borrowers, then each borrower is jointly and severally liable for each others’ debts. So if one co-borrower fails to meet his or her loan repayments, the bank will hold the others liable for that debt.
Under standard mortgage documents, borrowers are typically in default 14 days after missing a single payment, even if only one co-borrower is in default.
Your lender may impose penalty interest of at least 2% on top of the existing rate from date of default.
If you can’t make your mortgage payments then the bank may serve an order for possession and sale of your property, even if the other co-borrowers are meeting their obligations.