ENSURING CO-OWNERSHIP ENDS IN CHEERS, NOT TEARS
You don’t often hear the words ‘bank’ and ‘love’ in the same sentence, but there’s one bank first homebuyers can’t help but love.
That’s because the bank already knows them intimately, cares deeply about their financial future, and has a history of giving more than taking.
Don’t believe me? It’s also a bank they already know well, and probably trust more than any other bank in the world. In fact, they’re already a client whether they like it or not, because they’ve been tapping it for credit time and time again since the day they were born.
That’s right. I’m talking about the Bank of Mum and Dad.
Parents Pty Ltd
Parents obviously want to help their kids break into the property market if they can. Not just because they’re sick of them being at home well into their 20’s or 30’s, but because they see good money wasted on rent that could be put to better financial use in an owned property.
With high prices making it difficult for first homebuyers to get a foothold, it’s true they need all the help they can get. And it may just be that co-ownership – as opposed to a guarantor arrangement – could help homebuyers set their families up for the future and allow parents to leave a legacy.
Co-ownership in Australia and New Zealand is usually structured as a tenants-in-common arrangement, where ownership is divided to an agreed share. This enables both parents and first homebuyers to pass on their share of the property to whoever they wish if they die, by naming them in a will.
So how do you ensure co-ownership doesn’t turn from familial love into hate?
A co-ownership agreement should set out how the buyers will govern the ownership over time.
1) Set your terms of endearment
Co-ownership success requires clear terms from the start. For example, what will the property ownership split be? What are the expectations when it comes to mortgage payments if there is a loan attached, and who will take care of ongoing costs like strata, council rates and maintenance?
How might circumstances like employment change for both parties in the coming years, and what happens if one party decides they want to sell up? To avoid the possible breakout of nuclear intergenerational warfare, a co-ownership agreement should set some of these terms in stone.
2) Be sure to mind the banks
If a loan is required to boost co-ownership buying power, locking in a pre-approval is a good idea. However, this means minding the banks. Applying for a loan with first homebuyers means parents will essentially need to go through the motions of applying for a mortgage themselves, as a bank will want them to unveil the nitty gritty detail of their finances and assets to prove they can service a mortgage should their precious progeny default.
Banks will also decide whether the loan qualifies as an owner-occupier loan or an investor loan, influencing the interest rate. At least with a 20%-plus deposit you’ll be able to kiss LMI (Lenders Mortgage Insurance) goodbye.
3) Shop with all eyes wide open
With parents as co-owners, expect logistical challenges getting your reinvigorated family posse to inspections, and tension over more unwanted opinions (otherwise known as wise advice) on why one person’s dream property is another’s nightmare.
Also, a note of warning: a capital injection from parents suddenly puts higher priced properties in more desirable locations within the reach, meaning things can get out of hand as eyes become too big for bank accounts. Set a budget to ensure serviceability adds up, and use the extra assets to build stability rather than stress.
4) Lay down the legal foundations
The transactional legal aspects of co-ownership will be managed by the homebuyer’s conveyancer and the vendor’s real estate agent while the deposit is taken and the settlement progresses. For example, all signatures and the ownership split will be required on the contract of sale. A co-ownership agreement should set out how the buyers will govern the ownership over time.
Be aware that first homebuyers with a significant investment from parents may lose out on government incentives like first home buyer stamp duty concessions, depending on their financial situation, and all co-owners will be assessed on the total outstanding debt if they ever want to apply for an additional loan. Did I mention now is a great time to get those wills updated?
5) Live the dream
Co-ownership opens a whole new world for those first home buyers lucky enough to have parents willing to invest in their financial future. With added financial security enabling them to exit the rental market, it can allow them to build wealth while having the stability of a place to call home.
They can also pay mortgage debt paid off faster if a loan is required. In the end, what could be a better co-ownership result than the Bank of Mum and Dad getting paid back in interest (AKA love), while first home buyers live out their long awaited property ownership dream?
About Louisa Sanghera
Louisa Sanghera is a multi award-winning mortgage broker and owner of Zippy Finanical specialising in home loans, property investment, commercial lending and vehicle and asset finance. Also a recognised industry expert commentator she contributes to a number of prominent industry blogs, podcasts and finance publications. You can contact Louisa on T: 0414 083 522.