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Co Ownership is not new but it can bring new risks to manage

Co-Owners and the new way to buy a property and help your kids

Buying a property with others — Co-Owners & Limited Equity Guarantees

With increasing housing prices, changes in our spending and saving patterns, the ongoing uncertainty from the GFC and uncertain government economic policy, many people are now looking to Co-Ownership as a way to enter the property market with lower cost and lower risk. Simply put, Co-Ownership is now mainstream.

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What is Co-Ownership?

Co-Ownership is a way of sharing the ownership of a property between two or more people – friends, family members, or partners (also called tenants-in-common).

It involves:

  • Pooling your savings with others to use as a deposit on a property
  • Combining your borrowing power to get a good home loan
  • Perhaps using a limited equity guarantee from a family member to further reduce bank fees
  • Paying off the mortgage on the property as a form of forced savings for the future, and
  • Having the flexibility to sell out your share of the property if you want to

Some of the Advantages

Becoming a Co-Owner of a property has many advantages.

  • You can split the cost of purchasing and running a property (legal fees, stamp duty, rates & repairs), which means you can get into the property market at a fraction of the cost you would pay if you were buying on your own.
  • You can also dramatically reduce the length of the mortgage and own a property sooner. For many people owning a property with another is a form of forced saving and an opportunity to capitalise on any increased valuation if the property market rises.

For many people owning a property with another is a form of forced saving and an opportunity to capitalise on any increased valuation if the property market rises.

What are the tools available?

Co-Ownership agreements – and managing risks

As with all investments, there is a variety of risks to be identified and managed; and this is true when purchasing property with others. The best way to reduce all the potential issues is to simply get a Co-Ownership agreement in place before you buy property as tenants-in-common. (or, if you’re already a Co-Owner, you can get a retrospective agreement).

  • A solicitor can help you with the legal issues, an accountant with the tax implications (if you’re buying a property as an investment) and a financial adviser can bring it all together for you with the appropriate lending structure.
  • A Co-Ownership agreement can list the agreed time for holding the property, and the responsibilities of each party to meet their half of the mortgage repayments and can list what should happen if later on, one party wants to buy the other out.

Most importantly, the agreement should include income protection insurance so that if one or both of the co-owners were unable to work due to sickness or injury, they would still have an income and could still meet their respective repayment obligations to the other.

Income Protection Insurance

Most people don’t know that you can insure up to 70% of your income if, through sickness or injury, you are no longer able to continue to work. This professional insurance cover provides worldwide 24 hour a day protection. It can also be paid for from your superannuation fund once a year, rather than your personal cash flow. There really is no excuse not to have Income Protection Insurance in place and it is particularly important when you are a Co-Owner of a property with mortgage responsibilities.

Specialised limited guarantee mortgages

New types of mortgages are now available for Co-Owners to essentially take out two separate loans so their finances remain separate and they can pay back their share at their own pace (with each liable for the other on defaults).

A family member can use the equity in their own home as additional security for a co-owners mortgage. This reduces the loan-to-value ratio (LVR) and can save a significant amount of money. It also reduces the size of the deposit required to purchase a property.

  • By reducing or even removing the need to pay the banks' lender's mortgage insurance (LMI), can represent easily $20,000 in savings and reduce the total mortgage debt you have to pay back
  • A guarantor can nominate a specific amount to limit the guarantee they provide, subject to the Bank's approval at the time of the request.

Case Study: Only saved half a deposit? John wishes to buy a $400,000 property. He has a strong income and 10% deposit, but if he can find an equity deposit guarantee from a family member for an additional 10% of the loan, he can save thousands by not having to pay the bank's lenders mortgage insurance.

Great income, average savings

Case Study: Terry and Susan are siblings with separate and independent lives. They enjoy the freedom of renting in the inner city with their partners but don’t have a sufficient deposit for a property. As part of a 5 year strategy to start a forced savings plan, they decide to purchase an investment property together as Co-Owners. They work out their expectations and timeframe and then have a solicitor draw up a Co-Ownership agreement. They now have a new investment property, a healthy set of tax deductions, and a savings plan quietly working in the background to help them start saving for their own property in the future when they are ready to start a family.

Case Study: Family fixed amount guarantee: Louise has two adult children living at home; one has just finished law at University, the other carpentry at TAFE. Both are starting out in different careers and have decided to remain living in the family home for the next 5 years as they both want to put some money aside and make up for their lower incomes during their time studying. Their parents have agreed to offer a limited amount guarantee, in the form of home equity, so that together they can purchase an investment property by capitalising upon the low cost of living at home.

5 Reasons to Consider Co-Ownership

  1. Sheer affordability – 2 people paying down the mortgage is better than one
  2. You may be happy renting and enjoying that lifestyle, but you also want to maximise your tax deductions and get some bricks-and-mortar assets behind you at the same time
  3. You have a great income, a strong job, just not the level of savings for a deposit on that inner-city penthouse that you have always wanted
  4. You are happy for the kids to continue to live at the family home but you want them to put some of their funds toward getting ahead
  5. If you are not a natural born saver, but you're great at keeping on top of your bills, having a regular mortgage to meet can be a great forced savings machine.

The next step

Build your team of experts to help you see if this option is right for your personal circumstances and how you can protect yourself from the key risks.

author pic drew browneDrew Browne is a specialty Financial Risk Advisor working with Small Business Owners & their Families, Dual Income Professional Couples, and diverse families. He's an award-winning writer, speaker, financial adviser and business strategy mentor. His business Sapience Financial Group is committed to using business solutions for good in the community. In 2015 he was certified as a B Corp., and in 2017 was recognised in the inaugural Australian National Businesses of Tomorrow Awards. Today he advises Small Business Owners and their families, on how to protect themselves, from their businesses.  He writes for successful Small Business Owners and Industry publications. You can read his Modern Small Business Leadership Blog here. You can connect with him on LinkedIn Any information provided is general advice only and we have not considered your personal circumstances. Before making any decision on the basis of this advice you should consider if the advice is appropriate for you based on your particular circumstance.

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