Owning your own home in Australia has long been the Great Australian Dream, however it is becoming a distant dream for many Australians. With wage growth close to the inflation rate, and the price of properties booming over recent years, many people can no longer afford to buy property on their own.
Start-up "Kohab" launched an on-line property platform in March 2018 which provides a marketplace for friends, family and like-minded buyer to purchase property together. The platform connects purchasers with property, real estate agents, legal advisers, mortgage and insurance brokers.
The chief executive and founder of Kohab, Mr. David Dawson has said "The phenomenal growth of brands such as Uber and Airbnb have clearly demonstrated that the share economy is alive and thriving." Kohab believes that the dream of owning property can be born again through Co-ownership.
What is Co-ownership?
Co-ownership is simply two or more people sharing the ownership of a property. Co-ownership can be in a number of forms, such as:
- Live together – so combine your budget with a friend, or family member to co-own and live together in your preferred house and/or your preferred location. This could include young singles looking to switch from renting to Co-owing, or even a mum or dad moving in with their adult son or daughter;
- Co-invest, one lives in the property but the other does not – Share the cost of investing by combining with others for a greater choice of properties and locations. This could include a young couple looking to enter into the property market and their parents invest in the house, to help their children on their way. Caution needs to be exercised here – see our further article on parents lending money to children. Alternatively a friend or acquaintance may assist as the investor. The Co-owner in occupation could even pay an agreed rent to the other Co-owner for the part of the property they are "renting", making the investment for the Co-owner potentially tax deductible for the investor;
- Share a second home – Co-own an investment property where neither lives in the property, and you both receive rent as the Landlord and share expenses, or perhaps Co-own the holiday home that you've always wanted by sharing the cost with friends – a little bit like time share arrangement which is a vacation licence but in this case, you will actually own the property.
The benefits of co-ownership can include:
- Your share of the purchase price can be halved or more;
- You may be able to take on a more expensive property by purchasing together;
- Your borrowing capacity may be increased;
- First home buyers may now be able to enter the market;
- Statutory costs such as stamp duty and land tax (if applicable), legal fees and on-going maintenance can be shared.
- You already have a level of trust with a person with whom you have an existing relationship;
- You will be more confident with a Co-owners Agreement with a clear understanding of the other Co-owner's expectations.
How does Co-ownership work?
Common concerns with co-ownership include what happens if a co-owner's ownership goals change, or the relationship deteriorates. That's where the Co-ownership Agreement comes in to clearly define and document the obligations and responsibilities of each party.
Understanding each party's goals is important, and to determine if they are short-term, mid-term or long term strategy. For example, a young man may see his investment as a mid-term strategy thinking in the future he may get married and may then may want to sell the Co-owned property and then buy a property with his wife. A well drafted Co-ownership Agreement is likely to assist in achieving this outcome.
Here's how Co-ownership works:
- The Contract
The Co-owners will enter into a contract for the sale and purchase of land together and then go on title as tenants in common. This can be either in equal, or unequal shares depending on the specific arrangement, so the structure could be 50/50 or 90/10 share or even 40/30/30 shares if there are three Co-owners.
- The Mortgage
The Co-owners enter into a mortgage together.
National Australia Bank has been selected by Kohab as the lender. The Mortgage product is called a Co-Borrower Loan and has been specifically developed for Co-ownership.
The Mortgage holds each Co-owner responsible for their part of the Loan only. This means that individuals do not have to guarantee their Co-owners Mortgage repayments, and if buying half or a quarter of the property, their deposit and repayments are based only on that percentage ownership. Mortgage insurance is provided in the case of one Co-owner defaulting on the Loan.
Commonwealth Bank of Australia also have a mortgage product called Property Share, however we note this product requires each party to guarantee each other's loans as security support.
- Co-ownership Agreement
The Co-owners enter into a Co-ownership Agreement. Co-ownership Agreements (also known as Tenants in Common Agreements) have actually been around for a long time, it's just that many people were not aware of them. Kohab research indicates that sixty-five percent of people have never heard of a Co-ownership Agreement.
A Co-ownership Agreement sets out the obligations and responsibilities of each party including but not limited to:
- What contributions to the deposit and purchase price each party makes;
- What share of the property each party holds;
- Who pays the mortgage repayments;
- Who pays for what expenses of the property, such as Council Rates, Water Rates, Strata Levies Land Tax (if any), and services such as utilities, gas electricity, telephone, internet, and insurance;
- Who pays for maintenance and repairs to the property;
- What happens if someone wants to improve the property with capital works;
- How you deal with the capital gain when the property is sold;
- What happens when one party wants to sell;
- What happens when a party dies; and
- What happens if there is a dispute.
Will it work?
Co-ownership Agreements have been successfully used for many years to set out the rights and obligations of the parties who jointly own property.
So long as the parties are open and forthcoming with their expectations, then they can be a good legal vehicle for our younger generation, or any generation for that matter, to embrace when considering entering into the property market.
In a number of articles to follow we will look at some businesses that are successfully offering fractional ownership of property and a market to trade the units which represent those fractional interests. We will also let you know how blockchain technology might be used to create fractional interests in property, which will also give rise to co-ownership challenges and opportunities.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.