Please be clear, we are not lawyers and the following is not legal advice.
We are often asked about buying a property with another person, be they couples, friends or family it can be an easy way of getting into the property market or expanding a portfolio faster than you could do acting alone. It can be a great outcome however there are traps and technicalities you need to consider. The most important being that no matter which lender you choose all parties are liable for the entire debt ( joint & severally liable ). This is usually enforced either by having all parties on the mortgage document or all parties as guarantors for each other. This will even include anyone of the buyers who doesn’t require a loan ie: they have sufficient cash available for their share. As far lenders are concerned if your name appears on the title then you are to one extent or another liable for the total debt secured against that property.
Also keep in mind that while some lenders offer what appears to be separate loans to each borrower ie: the accounts are in each individuals names, don’t think you are released from responsibility as these loans still require all participants to guarantee the entire debt. This is a liability for each individual and can have very serious impact on an individual’s future ability to obtain further finance ie: as you normally have to declare all of the debt ( not just your share ) meanwhile you only get credit for your share of the income … there are some exceptions but not many.
What is Joint Ownership
This is typically a couple ( married or defacto ) jointly borrowing to purchase the family home. Both borrowers are liable for the total debt and on the death of one borrower the remaining borrower/s take up that persons share of ownership. For investment properties the income and tax are typically treated as 50/50% so a borrower with a large income may not be maximising their deductions under this structure. However lenders like joint loans, they are cheap and simple to structure and enforce.
Tenants in Common
So one of the fundamental differences with tenants in common the person’s share becomes part of their estate and so transfer of ownership can be dictated by their will.
Apart from investor partners, buyers who should carefully consider tenants in common are:
- a mix of non-spousal family members who have their own children or spouses
- couples with offspring from a previous relationship – to protect the inheritance interest of those offspring,
- couples who are using a parental guarantee – can be structured to offer some protection to parents,
- where an individual wants their share to become part of their estate for inheritance purposes.
Another important difference is the ownership can be apportioned according to whatever ratio you desire but typically for unrelated partners it is based on the amount of money/equity that each person contributes and is normally described in a binding agreement. For couples with a large disparity in income the ability to apportion ownership and as result the deductible borrowing can have major taxation benefits ….check with your accountant on this.
Now for the down side
An important difference with joint ownership is that one owner can sell their share without impacting on the other’s ownership. This sounds like a benefit and it can be however, this requires careful consideration and a clearly defined process within an ownership agreement so that all parties understand their options right from the start. You have to realise that without an agreement the share of the property can be sold to anyone – without your permission or approval. For example in NSW the law states :
Tenants in common hold a share in the whole of the estate or interest, i.e. no tenant is entitled to exclusive possession of any part of the estate, each tenant being entitled to possession of the whole of the estate or interest in common with the other co-tenants.
As mentioned above the other main down side is the impact that the mortgage can have on your future borrowing capacity and this factor alone is often the cause for disputes and sale of the property.
It sounds great and in reality it isn’t difficult to achieve as most home lenders are happy to lend with this structure and the legal requirements are minimal but in that lies the risk so please get good legal and mortgage advice before committing