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Great for getting on the property ladder but here's what to consider before committing
With the bumpy and ever-changing property market of the last few years, many buyers have considered purchasing a house with the help from family or friends.
It has become more common for property to be purchased by ‘co-owners’ who split the mortgage and take care of the maintenance jointly.
It may sound like a convenient and easy way to get on the property ladder, but there are potential legal implications to consider before purchasing a house with others.
Key considerations
Relationship matters
Think about your relationship with your co-purchasers. Essentially, this is like going into business together or getting married. With vast sums of money involved there is always potential for the relationship to break down and make the ownership complicated.
Family home or investment property?
All parties need to be clear about their intentions before looking to purchase a property. One party might want it to be the family home while the other might think of it as an investment property.
Clarifying the intention of each party early will hopefully prevent future argument or dispute. This is important as once the sale and purchase agreement has been signed and declared unconditional, barring a vendor default, the agreement cannot be cancelled.
Financial transparency
It is important everyone is transparent about each of their financial contributions at the outset and throughout the ownership. Each party will have a share in the property, so it needs to be agreed on how this will be recorded on the title of the property.
A distinction also needs to be made as to whether the ownership will be as joint tenants or tenants in common. Joint tenants means that on the death of one of the owners their share will automatically pass to the other owners whereas tenants in common allows their share in the ownership of the property to be transferred in their will.
It goes without saying that upon acquiring an asset like a property the new owners should execute a Will at the same time as buying the property.
Commonly, the financial contributions tend to reflect the share amounts but there should be flexibility to allow those recorded proportions to change should one particular party want to put more money into the property whether by way of improvement of the property or reducing the funds owed to the bank.
Personal liability
Be aware of the impacts on your personal liability. When obtaining lending from a bank, the bank in most cases would require a mortgage to be registered on the property’s title.
All purchasers will therefore be noted as mortgagees and be jointly and severally liable for any loans taken out with the bank and secured through the mortgage. This means that if they default on payments, the bank can call on all of them to pay the total debt. Banks will only consider your half portion of the property as your asset but will recognise the whole of the mortgage as a joint debt.
It is also important to consider the occupations of each person and whether they are at risk of potentially losing their job and being unable to contribute to property costs or whether they might be sued for negligence or face exposure as a director. In such circumstances they should consider owning their share in a trust.
Navigating potential issues
Entering into a Property Sharing Agreement is one way to help overcome any potential issues that may arise and in the worst outcome provide an agreed exit strategy for all the parties.
The agreement ensures all owners are aware of how, who and what is covered in every possible situation including:
- Options to purchase shares
- Making of mortgage repayments or paying outgoings
- Maintenance and upkeep of the property
- Detailed ownership structure or variation of structure as circumstances change including the exiting of parties
- Determining the value of the property
- Determining how the property is to be sold
- What happens when the property is sold with regards to the distribution of funds
Obtaining legal advice before starting the purchasing process means all considerations are covered and ensure the parties start out on a happy path while potentially allowing them to also finish as friends as well
If you are considering buying property as a co-owner, Haigh Lyon can provide advice on the process and assistance when entering a Property Sharing Agreement. Contact Shaun McGivern on @email or 09 306 0623 or Jason Hendriks on @email or 09 09 306 0603