In today’s market of high property prices and strong capital growth, co-purchasing a property with family or friends can make good financial sense.
However, it’s important to take a pragmatic approach to ensure you co-purchase your property wisely.
Discuss the buying structure
There are many ways to own a property, including in your private name, as a company or even as a trust asset. Each structure has benefits and disadvantages, so it’s best to speak with a legal, tax or financial adviser as to which structure will work best for you, especially taking into account tax benefits.
How to split ownership
Be sure to discuss how you intend to split ownership of the property with your lawyer before you decide to buy.
If you’re co-purchasing with friends, for example, you may wish to split your ownership shares according to the percentage of your respective contributions such as 50:50 or 60:40.
In this case, your purchase contract and certificate of title will state that you are ‘tenants in common’. This means that each person owns their own respective share and can sell, lease or otherwise deal with it as they see fit.
If, on the other hand, you are buying with a partner you may wish to opt to purchase the property as ‘joint tenants’ – meaning that you both effectively own the whole property. In the event that one person dies, the other would assume the whole title to the property.
Your lawyer will be able to provide you more information about these arrangements.
Seek Legal Advice
It’s important that each person who is a party to the co-purchase arrangement receives legal advice. It might also be a good idea to get legal advice as to whether you need a written agreement which reflects the rights and obligations of the parties to the arrangement.
One mortgage or more?
More often than not, finance is required to secure a property – even if it is a co-purchase. Problems arise, however, when purchasers act as joint borrowers.
This is because lenders usually have a right to recover outstanding money from borrowers jointly and individually. The impact for borrowers is that if one person defaults under the loan, the rest of the borrowers are still liable for the full amount of the debt and can risk an adverse credit impact if they don’t repay the defaulting borrower’s share.
So how do you avoid this situation? Each borrower may opt to take a mortgage for their share, so there is a first, second and maybe even a third mortgage on the title. However, each lender has to agree to this arrangement.
Alternatively, you might consider setting out the parties’ rights and obligations in the event of a default in a written agreement drafted by a qualified legal adviser.
While co-buying a home can be a savvy buying idea, it’s important to obtain independent financial, tax and legal advice. That way, you can protect your rights and enjoy peaceful property co-ownership now and in the future.