Few people can afford to buy a property alone. If you are a couple, the chances are you will buy together. If you are not a couple, you could buy with parents, other siblings, or even friends.
When you purchase a home with someone else, there are two ways of organising the ownership: either via joint ownership or as tenants in common. And just because you are a couple, do not assume there is only one way – especially if you are in a de-facto relationship.
I often get confused between the two, too, so I am constantly reminding myself. When you buy property, you want to make sure you pick the right one. Choose the wrong one, and it could be a disaster.
Joint ownership
Also known as joint tenancy, this is the most common way to own a home when you buy with a partner or spouse. But if you are in a de-facto relationship and do not want a world war should the unfortunate split happen, be careful.
The co-owners own the property as a whole, and neither party has a specific share, even if one pays the lion’s share of the deposit or the running costs – even if they pay all of it.
When it comes to a mortgage, it will be a joint loan based on both people’s incomes with the usual affordability checks undertaken by a bank.
Both borrowers will be jointly liable for the mortgage debt, so if one person can’t pay their share of the payments, the other will be expected to make up the difference.
We usually say that joint tenants is typically the option best suited to couples who are married or in a civil legal partnership. But not always. If you have a relationship that is based on a financial agreement, also known as a pre-nup, make sure you follow what the financial agreement says. If you are a blended family, you want to be careful, too. If you are in a de-facto relationship this may not be for you either.
Just remember one thing. If you sell, the owners are entitled to an equal share of the proceeds regardless of how much they contributed to the deposit, running costs at the outset, or the mortgage.
Should one of the parties die, the surviving co-owner automatically owns the whole of the property, irrespective of any wishes contained within a will. And that means any assets held as joint tenancy or ownership should never be included in a will.
And that is why this may not be ideal if you are in a relationship and do not want your share to go to your partner. Why would that be the case?
If you split up, you cannot give your share of the property via a will to your new spouse, kids, or even siblings or parents. It automatically goes to your ex-partner, whom you may now hate, and they will be laughing all the way to the bank.
The same is true if you have children from a different relationship. They will not be able to ‘inherit’ your share of property.
Joint tenants in common
This option is best suited to friends or family members buying a property together, but it also makes sense if you are in a de facto relationship and even in blended families.
Each tenant owns a specific share of the property, which is legally documented. The proportions don’t have to be equal, so could be noted as 50:50 or 99:1 – or anything in between.
You have to instruct a solicitor to make sure the correct percentage is noted on the title deed.
This arrangement can work well if all parties want to remain living on the property. But if circumstances change for someone wanting to leave and sell their share, it could mean the remaining owners have to buy their share out.
This option may also be beneficial to couples who buy a property with a view to passing it down to the next generation.
That’s because if one of the tenants-in-common dies, their share of the property doesn’t automatically transfer to the surviving owner(s). Instead, the share of the property passes to their estate and then the beneficiaries of their will. This means their will can state who gets their share of the property.
This can be useful in blended families. I often see people with children from previous relationships who choose the tenants in common option because it guarantees that their children will benefit as their share is left to them in a will.
Tenants in common might also suit couples looking to maintain their financial independence or safeguard individual investments, particularly where one holds significantly more wealth than the other.
I recently met a doctor who is in a de-facto relationship with another medical professional. They are living together in their partner’s home. They are about to purchase property together as an investment. The doctor has ‘given’ money to the medical professional of $500,000 to set off against her house loan. The doctor is also providing the lion’s share of the deposit and will fill the gap of the negatively geared property.
If they decide to buy the investment as a joint tenancy, there could be dangers. What happens if they split up and must subsequently sell? What happens if one dies? The $500,000 could also be at risk. The medical professional can claim it was a gift from the doctor to them.
As you can see, there are many variables, and often, the conveyancer dealing with the purchase will try to discuss this over a simple 5-minute phone call. Do that at your peril.
Protecting your assets is step 1 of our 9 steps to working less, earning more, and creating wealth. If you want to know more, contact hitesh@medisuccess.com.au or call 07 3172 0819.
