Due to the cost of property these days and a desire to get your foot in the property door, you might be contemplating buying a property with a spouse, partner, sibling, relative, or even a friend. There are a number of ways to do this.
In Australia, shared residential property ownership falls into two categories, joint tenancy and tenancy in common, and both give each co-owner individual rights of ownership and a share in the property. But while they might sound similar, there are important distinctions.
The difference between joint tenancy and tenancy in common
A joint tenancy arrangement is where the ownership of a property is held jointly and equally by two or more people. A joint tenancy is usually taken out by a married couple or partners, and comes with an automatic ‘right of survivorship’, so when one partner dies the interest in the property passes directly to the survivor and does not become part of the deceased property holder’s estate.
A joint tenancy arrangement is not limited to residential property and can be applied to all transactions including commercial or industrial property. Additionally, joint tenancy agreements can be dissolved following the breakdown of a relationship.
Tenancy in common involves two or more people owning a property but with no right of survivorship to the other parties. In this scenario, when one of the property owners dies, their interest becomes part of their estate without necessarily passing to the other owner or owners. With a tenancy in common, each of the owners is entitled to possession of the whole property, meaning no one owner has control over any part of the property, such as a room or structure.
There is also no requirement for the property owners to hold an equal share in the property, and couples may opt for a tenancy in common arrangement where one holds a far greater share of the property for estate planning or tax purposes.
These arrangements can be altered throughout the course of your mortgage but lenders will need an agreement at the outset in case one or both parties default on the loan and they need to take remedial action. In the advent of a divorce or separation, joint tenants can end their arrangement, which will usually revert back to tenancy in common, though each State has their own rules, so you’ll need to check with a solicitor first.
Some lenders may also allow a hybrid form of tenancy, where two parents take a half share in a property with their son or daughter and their spouse. In this scenario, there is a joint tenancy between A and B, and C and D. However, if A or B dies, their share passes to the other parent but not to C and D, and A or B can then nominate their share to someone else in a will. This can end up being quite complicated, and it may be better to arrange a guarantor loan instead of getting the parents’ names on the title in the first place.
Purchasing a property is possibly the biggest financial commitment you will ever make, and buying one jointly requires a lot of trust in the other party given the length and cost of the average mortgage. Joint tenancy and tenancy in common arrangements each have their good and bad points, which you should definitely take into account before making such a big decision.
Pros and cons of joint tenancy
Gives you a foot in the property door: Buying a property with someone else, regardless of whether it’s a joint tenancy or other arrangement, allows you to enter the market where you may otherwise struggle to come up with a deposit or show that you can make the repayments on your own. Having an equal partner allows you to share the burden right from the outset of your mortgage journey.
Right to the entire property on death of a joint tenant: If your co-owner dies you inherit their share of the property in its entirety under the terms of a joint tenancy. The right of survivorship is exclusive to joint tenancy arrangements.
You receive rents and profits from property: Having a joint tenancy entitles you to half the rents and profits from your property, should you choose to sell it at any time. You are also only obligated to pay your share, or half, of costs such as annual council rates.
Reliance on joint owner for decision-making: You cannot sell the property or make major renovations without the consent of the other party in a joint tenancy arrangement. Most of the time this shouldn’t be an issue if you’ve entered into this arrangement with a spouse or long-term partner, but you’ll want to be sure that you’re on the same wavelength before you sign on the dotted line.
Exposure to changed circumstances and partner’s finances: Buying a property, even with a spouse or partner, means you are exposed to their financial situation and their ability to make their share of the repayments. This means you need to factor in what could happen if one or both of you lost your primary source of income. Unlike with a tenancy in common, in a joint tenancy you are responsible for the payments if your partner can no longer pay their share. Any future inability to repay your mortgage could also have a negative impact on your credit rating.
Maintenance and repairs: Under the terms of the joint tenancy arrangement you will be equally liable with your partner for repairs and maintenance, rates, and all fees and charges associated with your mortgage, which could become an issue if one of you ends up unemployed for a period.
Pros and cons of tenancy in common
Gives you a foot in the property door: A tenancy in common will offer a lot of flexibility if you’re desperate to own your own property and you can’t afford one by yourself, especially if you’re single. Under a tenancy in common, you could theoretically buy a property with three or four mates, all opting to put in a share of the deposit and make the required repayments. Each lender will have a different policy, but strictly speaking there is no limit to the number of mortgage holders on a tenancy in common.
No need for equal shareholding: There is also no need to own an equal share in the property and each owner may own a different percentage, making it easier again to take a smaller stake and gain at least some ownership of a property.
Flexibility, including the ability to add owners over time: Unlike with a joint tenancy, each tenant can deal with their share of the property independent of the others, meaning they don’t require permission to sell their share of the property. It is also possible to add new owners or buy out another owner’s stake relatively easily.
Tax benefits: As already discussed, with a tenancy in common arrangement there is no need for equal ownership in the property. That means that, if you are part of a couple, the higher earner can take a stake as low as 1%, which could be beneficial for purposes such as capital gains tax on sale of the property, though it’s always a good idea to talk to an accountant or a property solicitor first to maximise any tax potential.
Co-owner can sell their share without consultation: One of your co-owners can sell their share in the property, leaving you in a partnership with another owner who you may not know and who could prove to be difficult. Given that all owners are equally liable for costs involved, such as rates, mortgage repayments and repairs, you could find yourself in a challenging situation.
No automatic survivorship rights: With no right of survivorship, a similar situation could develop on the death of one of the owners. Additionally, while no owner is required to own an equal share in the property, every tenant has the right to use the property in its entirety.
All tenants are equally liable for debt: All of the tenants are obliged to pay their share of whatever costs are involved in the repayments and maintenance of the property, regardless of the size of their share, so you need to be able to rely on your co-owners to avoid any issues.
Reliance on other tenants for payments: Just as with a joint tenancy, you are somewhat at the mercy of the other tenants in common to make their repayments to ensure the mortgage doesn’t fall into arrears, which could become a real issue, especially if you don’t even know one or more of the other owners.
DIVE EVEN DEEPER
Enlisting early help from a lending professional, doing neighbourhood-level research, and factoring ongoing costs into your budget are some key tips for first-time home buyers to consider.