It has long been the norm to buy a home jointly with another person. In the vast majority of cases that ‘other person’ has been a spouse or partner, but with the cost of housing sky-rocketing, a growing number of people are getting together with friends to jointly purchase a home to live in.
This can deliver both social and financial benefits. However, there are some potential complications that need to be navigated, as Steve, his sister Harriet and their friend Matt discovered when they decided to buy a home together.
Yours, mine or ours?
The first issue the trio encountered was the structure of home ownership.
Their mums and dads had all purchased homes as joint tenants. (Note that in this context, the term ‘tenant’ actually applies to a buyer, not a renter.) It remains the most common arrangement when a couple buys a property. It gives each party an equal share, and if one dies the survivor automatically gains ownership of the whole property.
This was hardly ideal for Steve, Harriet and Matt, who each wanted to own a specified fraction of the house. This was achieved by buying the home as tenants in common, giving each an individual asset that can be sold separately or bequeathed to a person of their choice. Tenants in common can own different fractions of the house. In this case Harriet, the highest income earner, took a 50% share in the property. Steve and Matt opted for 25% each – still a worthwhile step onto the property ownership ladder.
Harriet, Matt and Steve were also able to access federal and state first homebuyers’ incentives, but only because they all met the qualification criteria.
Write the rules
Whether it’s the shared purchase of an investment property or a home to live in, a critical component is a co-ownership agreement. This sets out the rules on when or why to sell the house, who gets to choose a replacement if a part owner wants to exit the arrangement, and all issues related to borrowing and maintenance costs.
For Matt, Steve and Harriet the big benefit of their shared purchase was that, by pooling their incomes, they could borrow more and buy a nicer house in a more desirable location. The catch is that they are all jointly and severally liable for the entire loan. This applies even if they each take out their own mortgage, so when Steve lost his job and couldn’t meet his share of the loan repayments, Harriet and Matt were responsible for making up the shortfall. Matt was unable to increase his loan repayments, leaving Harriet to carry the can alone. There was a very real prospect that the bank would step in and sell their now cherished home, however Steve landed a new well-paying job and quickly caught up on his payments.
Talk to the experts
Buying property can be complicated at the best of times and co-ownership introduces an additional level of complexity. Sharing the purchase of a property can be a wise move, but make sure it is backed up with the wisdom of experts. Real estate agents and mortgage brokers can both be good sources of information, but also run your plans by your licensed financial adviser before making the big commitment.