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With property prices nationwide still making ownership unattainable to many, families are looking into alternative methods to get onto the proverbial property ladder.
One such method that is on the rise, particularly for young professionals, is co-owning with their parents. Children being helped out by the “bank of mum and dad” is far from a new concept, but in this modern world has given a new lease of life for families searching for a smarter way to purchase property.
When surveyed, 37 per cent of Australians said that they would consider co-owning with a family member or friend, if it would make purchasing property more affordable.
However, going into property with family carries its own set of risks. Despite a close bond, there are many pitfalls when purchasing with siblings or parents, ones that can be avoided by taking careful steps to ensure you have a formal co-ownership agreement in place to protect all parties.
My top five tips to families wanting to purchase property together are:
1. Decide who can afford what: As with families, no co-ownership agreement looks the same. You may decide that it will be a 50-50 split between the two parties or 70-30 or three parties on title at 40-30-30. Parents may require their children to pay rent on the portion of the property owned by the parents, in order for them to service their part of the loan. What is key is making sure that this is all documented in a legal manner and understood by all, should there be any unforeseen hiccups further down the track.
2. Document your roles and expectations: While in a dream world we would all have the same views on everything, that’s not always the case. I can’t stress enough how important it is to be clear and agree on your roles and expectations of co-ownership to avoid any disappointment down the line and to ensure that all parties have a smooth and beneficial experience of co-ownership.
3. Have an exit strategy in place: How parties exit a co-ownership purchase is one of the main questions I encounter from families. Make sure that exit options are clearly defined. It could be that the parties agree on first right of refusal to purchase the exiting parties’ share, or another co-owner is introduced by the leaving party or the property is simply sold on the open market and the sales proceeds split according to the percentage of ownership. This will ensure that leaving doesn’t impact negatively on the parties who want to stay. Co-ownership isn’t necessarily a forever arrangement, and people’s circumstances change.
4. Be mortgage aware: It’s critical to obtain the right mortgage. Look for a mortgage that allows multiple parties to borrow against the one title. There are loans in the marketplace where serviceability can be split according to your individual percentage of ownership. For example, if a $800,000 property is purchased between two co-owners at 50-50 each, the co-borrowers should look for a lender that assesses their serviceability based on their income of their portion of the loan only. This means that if both parties combined have a $600,000 loan on a $800,000 asset, they need to be able to service $300,000 each and not $600,000 each.
5. Make sure you have a co-ownership agreement: As you can see, there are many ways that this process can become a negative experience, but that really doesn’t need to be the case provided you have a co-ownership agreement in place, outlining all of these scenarios. Co-owning with family may seem like a no-brainer, but it’s always important to have legal agreements in place to protect you all.
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