Disclaimer:
The information on this website is for general guidance only and does not constitute financial or investment advice. Always do your own research and seek personalised advice from a qualified financial adviser or mortgage adviser before making financial decisions. All investments carry risk and past performance is not indicative of future results.
Key Takeaways
- Co-ownership can boost borrowing power and share costs.
- Align intentions on living in or investing before committing.
- Financial transparency reduces disputes and surprises.
- A Property Sharing Agreement protects everyone's interests.
- Plan for KiwiSaver rules, exits, and estate outcomes early.
Schnauer & Co deal with many first home buyer enquiries. Often first home buyers find the conditional stage very overwhelming as there is a lot of new information to process. In this article, we turn the spotlight on the risks of buying property with family and friends.
We suggest you read this article after reading our earlier article "Co-owning property with family or friends" which mostly addresses the benefits of co-ownership.
The Benefits of Co-Ownership
Buying property with family or friends can make homeownership possible when it might otherwise be out of reach. The main advantages include:
- Increased Borrowing Power: Banks consider joint incomes, which can boost mortgage approval.
- Shared Costs: Mortgage payments, maintenance, rates, and other expenses can be divided.
- Spreading Risk: If it's an investment, the financial burden is shared across multiple owners.
Key Considerations
Aligning Intentions
Before buying, ensure everyone agrees on whether the property is a home or an investment. A clear agreement helps prevent future disputes, especially with changes in property laws.
Financial Transparency
Co-ownership is a major financial commitment, similar to going into business with someone. Consider whether your co-owners can manage money well, whether they have outstanding debts or financial risks, and whether they are financially stable for the long term. Being upfront about contributions and financial expectations is crucial to avoid future conflicts.
The Risks of Co-Ownership
- Decision-Making Challenges: All owners must agree on major decisions like renovations, refinancing, or selling the property.
- Financial Risks: If one owner struggles financially, the others may need to cover their share of the mortgage to prevent default.
- Exit Complications: Life circumstances change, and leaving the arrangement can be complicated, especially if the market shifts or co-owners' financial situations change.
KiwiSaver Considerations
If you're a first-time buyer using KiwiSaver, remember that you must intend to live in the home to withdraw KiwiSaver funds, and co-ownership could affect your future eligibility for first-home benefits.
Protecting Your Interests
Property Sharing Agreement (PSA)
A PSA outlines ownership shares, financial responsibilities, decision-making processes, and exit strategies. It's essential for avoiding disputes.
Important: A Property Sharing Agreement is one of the most important documents you can have when co-owning property. It should cover ownership percentages, financial contributions, maintenance responsibilities, and what happens if someone wants to sell.
Wills & Estate Planning
What happens if a co-owner passes away? Tenancy in common allows you to will your share, while joint tenancy means your share automatically goes to the surviving owner. Proper legal planning ensures a smooth transition.
New Relationships
If a co-owner wants to move in a new partner, a PSA should address how this will be handled. A Contracting Out Agreement (COA) may also be necessary to protect assets.
Legal & Financial Responsibilities
Joint and Several Liability
When co-borrowing, all owners are equally responsible for the mortgage. If one defaults, the others must cover the shortfall.
Warning: Joint and several liability means you could be held responsible for the entire mortgage if your co-owners cannot pay. Understand this risk before entering into a co-ownership arrangement.
Unequal Contributions
Ownership shares should reflect financial input. A PSA should define how costs and mortgage repayments are divided, whether capital gains are split based on initial contributions, and what options exist for buyouts if one owner wants to sell.
Independent Legal Advice
Each party should seek independent legal advice to ensure their interests are protected. While one law firm can handle conveyancing for all parties, separate legal advice is needed for a PSA.
Final Reflections
Co-owning property can be a smart financial move, but it comes with risks. Open discussions, legal agreements, and financial transparency are key to making it work smoothly. Seeking expert legal and financial advice upfront can prevent costly mistakes in the future.
Frequently Asked Questions
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