As property prices continue to rise across New Zealand, the traditional paths to homeownership are becoming increasingly out of reach for many. Co-ownership, where two or more individuals pool their resources to purchase a property together, has become an appealing alternative. While co-ownership offers significant financial benefits, it also comes with its own set of challenges. Here’s what you need to know before taking this step.

Understanding Co-Ownership: What Are Your Options?

Co-ownership involves two or more individuals jointly purchasing a property. The two primary forms of co-ownership are Joint Tenancy and Tenancy in Common.

• Joint Tenancy: All co-owners share equal ownership in the property. If one co-owner passes away, their share can automatically transfer to the surviving co-owner by transmission. It is important to know the property share never becomes part of the deceased estate.
• Tenancy in Common: Co-owners can hold unequal shares of the property and each party’s share can be sold, transferred, or bequeathed independently. The shares are distinct, and offers more flexibility, particularly when financial contributions vary. One can own a very specific share such as 23/151 share when calculating the contributions.

Why Consider Co-Ownership?

Co-ownership can be an effective strategy to achieve homeownership sooner and with greater financial flexibility. Here are some key benefits:

1) Shared Financial Responsibility
Pooling resources allows co-owners to share the costs of the deposit, mortgage repayments and property maintenance, making homeownership more affordable and achievable.

2) Faster Access to the Property Market
With property prices often outpacing individual savings, co-ownership can help you enter the market sooner and potentially benefit from future capital gains.

3) Enhanced Borrowing Power
By combining incomes and assets, co-owners may increase their borrowing capacity, allowing people to purchase a more desirable property or secure a location that might otherwise be beyond reach.

Potential Risks to Watch Out For

While co-ownership has clear benefits, it's not without risks. Here are some potential challenges to consider:

1) Shared Financial Liability
All co-owners are jointly responsible for the mortgage, meaning if one co-owner fails to meet their financial obligations, the others are legally required to cover the shortfall.

2) Impact on Credit and Borrowing Power
Financial issues caused by one co-owner may impact the credit ratings of all co-owners and the shared mortgage liability may limit future borrowing capacity.

3) Relationship Strain
Disagreements over finances, maintenance or long-term goals can put a strain on relationships. Without clear legal agreements and effective communication, conflicts can escalate into legal disputes.

4) Complicated Exit Strategies
Exiting a co-ownership arrangement can be complicated, particularly if there is no pre-agreement. Disputes over the timing or method of sale or transfer of ownership can result in unnecessary costs and time being wasted in legal disputes.

Key Legal and Financial Considerations Before Buying Together

Co-ownership can lead to complications if parties are not careful. Here’s what needs to be considered and documented before purchasing:

1) Property Sharing Agreement
A comprehensive Property Sharing Agreement is essential for any co-ownership arrangement. The agreement should outline:

2) Ownership Shares: Clearly define each co-owner’s share in the property, particularly if financial contributions differ. This can take into account contributions made by deposits, kiwisaver, maintenance or renovations to the house and future mortgage repayments.

3) Financial Obligations: Specify each party’s responsibility for the deposit, mortgage payments, maintenance, and other costs that may arise.

4) Exit Strategy: Set out the terms under which a co-owner can sell or transfer their share, including how the property’s value will be determined.

5) Dispute Resolution: Establish a process to handle conflicts and prevent escalation if parties disagree on maintenance, renovations or when to sell.

6) Life Changes: Account for life changes such as illness, death, financial changes or relationship changes as this will all impact the parties’ wishes.

7) Mortgage Considerations
Lenders will assess the combined financial strength of all co-owners when approving a mortgage. Ensure that all co-owners are financially stable and capable of handling the mortgage before entering the agreement.

8) Tax Planning
Co-ownership may have tax implications, particularly with capital gains tax when the property is sold and the home is not your main home. Tax advice may be required.

Ready to Take the Next Step?

If you are considering co-ownership, our property team is here to guide you through the legal complexities. Contact us today to discuss how we can assist you in achieving your homeownership goals.