With high house prices and interest rates, it is becoming increasingly common for first home buyers to partner with others to purchase homes. Co-ownership carries both risks and opportunities that should be carefully considered from the start.
Types of co-ownership
There are two main types of co-ownership:
Joint tenancies:
Each co-owner has an equal undivided share in the entire property. This option is commonly used when the two parties are a couple.
Tenancies in common:
Each co-owner has a separate, defined share in the property. Tenancies in common are more frequent when there is less, or no, relation between the co-owners due to the separate nature of the shares. Tenancies in common are almost always preferred for unrelated co-owners, particularly where contributions are unequal and co-ownership is temporary, or investment based.
A key difference between the two forms is that, upon a co-owner passing away, a joint tenancy interest will automatically go to the surviving owner by way of survivorship, but a tenancy in common share will become part of the deceased’s estate and be distributed in accordance with their will.
Third-party entities in co-ownership
In some cases, an unrelated third-party entity may become a co-owner. Third-party entities are normally property investment companies providing financial support to assist individuals in purchasing a property they might not otherwise be able to afford independently. A few examples of third-party entities providing co-ownership opportunities are Kainga Ora and YouOwn.
- Kainga Ora’s First Home Partner scheme is available for first home buyers, under which Kainga Ora will purchase the home with the first home buyer as tenants in common. Eventually, the first home buyers can purchase Kainga Ora’s share for full ownership, the goal being within 15 years.
- YouOwn’s co-ownership scheme for first home buyers offers to contribute funds to first home buyers which lessen the amount required to provide a deposit for a bank home loan. YouOwn may give up to 15% of the usually 20% required deposit. Over time, YouOwn’s share in the property can then be purchased for full ownership.
Benefits and issues of co-ownership
Co-ownership has the distinct benefit of the co-owners sharing deposit and mortgage repayments, making it easier to afford a home that would usually be unattainable for an individual.
However, there are some significant risks and challenges with co-ownership:
- Not all lenders offer home loans for shared ownership. From a lender’s perspective there are more risks involved when multiple parties will own the property, especially if those parties are unrelated.
- If one party defaults on their share of the mortgage repayments, the other party may become liable to cover the shortfall as credit issues for one party can affect the other.
- There may also be issues if the individual wishes to sell the home before having paid out the third-party entity. If the entity’s name remains on the title, it must give consent to a proposed sale which may not be in its interests.
- Disputes may arise over use, improvements, or sale of the property.
Co-ownership agreements and practical considerations
A co-ownership property sharing agreement can mitigate many of the risks associated with co-ownership. This private contract should set out:
- Ownership shares,
- Whether co-ownership should be as joint tenants or tenants in common,
- How mortgage payments and other costs will be shared,
- The process for selling the property and buying out shares,
- Dispute resolution processes, and
- Rules regarding occupation and decision-making.
It’s also important to consider that co-owners are typically jointly and severally liable for the mortgage, insurance, and compliance with council and building regulations. For couples, entering into a contracting out agreement allows co-owners to record separate contributions and, in the event of death or separation, ensure that their contributions remain separate.
Your lawyer can talk you through co-ownership and have the requisite documentation drawn up to ensure that your future is safeguarded. For further information, please contact a member of our private client or property teams.
Special thanks to Partner Dene Gavin and Solicitor Felix Chrysostomou-Koed for preparing this article.
Disclaimer: The content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.
