Are you looking to end your renting days and buy a property with a friend or family member? Co-homeownership can be a great way to step onto the property ladder, but it’s essential to understand the legal aspects of how you choose to hold that shared property.
Keep reading to discover everything you need to know about co-homeownership.
How to own the property
The thought of saying goodbye to renting and pooling your funds to purchase a property with a friend is exciting. Legally, joint ownership of a property in Western Australia can happen in several ways. The three most common are joint tenants, tenants in common or granny-flat eligible interest.
The first and most common way to co-own property is ‘joint tenants’.
Joint tenancy means that both people own the property together equally and when one person dies, their interest in the property passes to the other owner. Property and estate lawyers use the term right of survivorship. Notably, the right of survivorship applies even without a will. Just as important, joint tenants cannot bequeath their share of the property to just anyone. However, the last surviving owner can leave the property to anyone as part of their estate.
Tenants in common
Alternatively, you can purchase a property with a friend as ‘tenants in common’. Each person owns a specified share of the property with the tenants in common ruling. However, when one person dies, their interest in the property does not automatically pass to the other owner but forms part of their estate.
The benefit of this type of ownership is that you can own the property in unequal shares, like a 60/40 or 75/25 per cent split. For example, if Jane and Alison decide to buy a house together for $100,000. Jane pays $75,000 of the purchase price and Alison pays $25,000. Does that mean Jane owns 75 per cent of the property?
Maybe. The financial contribution doesn’t necessarily determine the share of property each person owns with tenants in common. The ownership percentage is whatever the joint homeowners specified in their agreement or will. For example, both Jane and Alison could own 50 per cent regardless of their deposit amounts.
Granny-flat eligible interest
With the median house price skyrocketing and pension-age parents needing care, the granny-flat interest option is gaining popularity. As cited on the Australian Tax Office (ATO) website:
‘A granny flat interest can be held in any property, provided it is a dwelling like an owner’s primary residence or separate property. An individual has an eligible granny flat interest if they have a right to occupy a property for life under a granny flat arrangement.’
As an example, the ATO website cites:
Jim and Joan are of pension age. They live in a home on a large block, which they are struggling to maintain.
They decide to sell their home and buy a 6-bedroom home in their son, Isaac’s, name. The home can accommodate themselves and Isaac’s family.
Jim and Joan:
- sell their old home for $800,000. The sale is exempt from CGT under the main residence exemption
- buy a new home for $600,000
- transfer the additional $200,000 to Isaac
- create a written granny flat arrangement with Isaac.
All the requirements of a granny flat arrangement have been met. Therefore, Isaac will have no CGT consequences for granting the granny flat interest to Jim and Joan.
For a granny flat arrangement to be exempt from CGT, the person with the granny flat interest must either:
- have reached pension age
- require assistance for day-to-day activities because of a disability.
Agreements reduce risks when buying with a friend
Property conveyancing expert and business manager of Strand Legal and Conveyancing, Kerry Cable, recommends formalising any co-ownership agreement with a lawyer before entering into a purchase agreement.
“People’s plans and dreams change so quickly, especially in this post COVID world. At Strand Legal and Conveyancing, we advise our clients to discuss ‘what if’ scenarios and what they agree to do should their circumstances change. For example, what happens when one party wants to leave the relationship or sell out of their share?”
Other important considerations include what happens if one party gets sick and can’t make the repayments or loses their job? All these potential risks need discussing and agreeing to before committing to co-homeownership.
Kerry explains that in co-homeownership situations, the most important document you sign may not be the contract of sale. Instead, it’s likely to be the Co-ownership Agreement.
Financial risks when buying with a friend
Credit rating risks
Given that co-owners names appear on the mortgage, both are responsible for making payments on time and in full each month. Should the loan fall behind, the lender will report both co-owners to credit agencies for non-payment. If you’re not the defaulting party, this could damage your credit score.
Lenders use your credit score to decide whether to give you credit or lend you money. A bad credit score could increase the difficulty of loan approval in the future.
Depending on the loan structure, each co-owner may be responsible for the entire loan despite the ownership. So when it comes to taking out another home or personal loan independent of the co-homeownership, your debt-to-income ratio (DTI) may appear too high.
While taking out another loan might not be in the foreseeable future, circumstances change. For peace of mind, it’s worth forecasting your DTI just in case.
Buying a house with friends or family often makes it easier to qualify for a mortgage. Plus, you can share all the monthly expenses, including utilities, maintenance or repair costs, and the mortgage payment. And unlike renting, you get to build equity as you repay the loan.
However, personal and financial challenges come with owning a property with family or friends, so it’s important not to rush the decision.
“Do your homework in advance, draw up a co-ownership agreement and make sure all parties have the income to meet the monthly expenses and repayments,” Kerry advises.
Need more help?
Talk to Kerry Cable at Strand Legal and Conveyancing when you need advice on drawing up a co-homeownership agreement.