What about Co-Ownership?

The property market can look a little daunting to many home buyers and investors today. They know they want to “get a foothold”, but the prices are so high. So they and their friends, who are in the same boat, grumble and moan until…eureka! Each one of them alone can’t get a foothold, but if they join forces….

It is becoming more common for groups of friends and investors to jointly purchase properties, and lenders are putting out a large range of products to cater for them. These products may allow you to buy property when you couldn’t before. But there are important issues to consider, such as the effect on your borrowing power and possible legal entanglements..

Let’s imagine two friends, Andrea and Peter. Each of them is renting, but they wish they were buying instead. Both of them have savings, but not enough for a deposit, and their incomes aren’t quite big enough to cover a mortgage near the places they want to live and work. Andrea and Peter decide to pool their resources with a co-ownership product. Together they have enough for a deposit on a two bedroom apartment, and their combined income is enough to cover the loan repayments. They now own their piece of property.

Andrea and Peter are close friends, but they’re not that close. They want to keep their finances separate. So they made sure they found a product that allows them to pay their loan automatically out of different bank accounts. They’re in each other’s house, but they don’t need to be in each other’s accounts. They also have different opinions on financial matters. Peter is pessimistic about where interest rates are going and wants a fixed interest rate. Andrea isn’t concerned however, fortunately their loan can also cater for their different choices in matters like this. Peter can fix his part of the loan, and Andrea can leave her rate variable.

Co-ownership products provide a way for people to buy property who were previously locked out of the market, and they increasingly allow the partners to keep much of their independence and make choice according to their individual preferences. There are some very important issues to keep in mind however, and some important downsides.

The first, minor, issue, is that whilst both of them are buying their first home, they have to share a single First Home Owner’s Grant. There’s only one grant to a property purchase, and they’ll never get it again. Much more importantly, Andrea and Peter may be getting a piece of property pie, but each of them is liable for the whole debt on the property. This can be a blow to their borrowing power in the future. Lenders will see the whole debt liability, but only part of an asset and a terrible income debt ratio.  Even if the property becomes an investment the entire loan is considered a liability while only half of the rental income is accepted.  As a result lenders will be much more wary of lending them money than they usually would be.

Now say that Peter finds the love of life and wants to get a house all of his own.  He can only use the equity he has in the half share  if he stays with the same lender and even then only with Andrea’s permission and probably with her as a guarantor.   If he wants to go to another lender  he would have to convince Andrea to agree to a refinance or simply forget the equity he has.  Even so he may struggle to secure a new loan because of the existing debt against his name, so he wants to sell out his part of the property. But who is he going to sell it to? Andrea may not be willing or able to buy him out. They could try to find a replacement for him, but there’s not much of a market for halves of apartments, and Andrea may not be comfortable in a financial relationship with someone else.

What if Andrea falls behind on her payments? Is their agreement prepared for this? Can Peter carry the debt, after all the bank still expects to be paid.   If these agreements go wrong – and over the life of a mortgage many unexpected things can happen – it is a recipe for litigation nightmares.

The products becoming available have agreements designed to cover many of the issues that can arise, such as defaulting or a partner wanting to sell out, but they can’t account for every problem. It also needs to be well sorted out in advance. This requires rigorous legal advice and consultation with your broker. It may seem a hassle, and perhaps a strain on a relationship, but lawsuits are even worse – and a lot more expensive!

Co-ownership products may be a good option for you if you want to buy a home or invest in property, but consider all these issues before you get in. They provide a lot of opportunities that wouldn’t otherwise be there, but a lot of potential problems as well.

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