Family, Friends, and Mortgages: A Recipe for Disaster?
Buying a home is often touted as the great Australian dream, but increasingly, people are turning to family and friends to make that dream a reality. While pooling resources can seem like a smart move, a recent case in New Zealand highlights the potential pitfalls of co-ownership and the importance of clear legal agreements. A woman received $10,000 in compensation after a bank froze her loan accounts when a dispute arose between her son and daughter-in-law, preventing her from repaying the mortgage even when she had the funds.
The Perils of Joint Ownership
The case, handled by the Banking Ombudsman, involved a partnership formed in 2008 to purchase a property with a $320,000 loan. When the couple separated, the bank’s refusal to allow the mother to repay the loan – despite her holding a 77% stake in the partnership – caused significant distress. This situation underscores a critical point: even with the best intentions, relationships can sour, and financial arrangements can grow incredibly complex.
Mortgage advisor Jeremy Andrews of Key Mortgages notes that he regularly assists clients exploring partnership purchases. “There are advantages, such as combining deposits for better interest rates and increasing borrowing power,” he explains. Although, he emphasizes the major downside: “What happens when one party wants out, perhaps to buy a different property?”
Joint and Several Liability: A Key Concern
Andrews points to the concept of ‘joint and several liability’ as a potential deal-breaker. “If borrowers are jointly and severally liable, the loan amount may be higher than any single borrower could qualify for on their own. Selling the property might be the only option to exit the agreement without significant financial strain.”
Clear understanding and independent legal advice are paramount before entering such agreements. Andrews suggests exploring ‘tenants in common’ arrangements, where each party owns a specified percentage of the property. This allows for a clear division of equity when the time comes to sell.
Navigating the Legal Landscape
The Banking Ombudsman, Nicola Sladden, stresses the importance of understanding rights and obligations. “When relationships end, joint accounts, loans, and partnerships can become tricky. It’s crucial to understand how your accounts are set up and what your rights and obligations are.” She advises prospective co-owners to proactively decide how assets will be divided in the event of separation and to seek formal legal arrangements.
Future Trends: Increased Scrutiny and Sophisticated Agreements
As homeownership becomes increasingly challenging, expect to see more individuals exploring alternative ownership models. This will likely lead to increased scrutiny from lenders and a demand for more sophisticated legal agreements. Banks are already demonstrating a willingness to intervene when disputes arise, as evidenced by the Banking Ombudsman’s case. However, their actions can sometimes exacerbate the situation, highlighting the need for clearer guidelines and a more proactive approach to resolving disputes.
We can anticipate a rise in the utilize of specialized legal services tailored to co-ownership agreements. These services will focus on creating robust contracts that address potential scenarios, including separation, financial hardship, and disputes over property maintenance. Lenders may begin to offer specialized mortgage products designed for co-ownership arrangements, with built-in mechanisms for dispute resolution.
FAQ
Q: What is ‘joint and several liability’?
A: It means each borrower is fully responsible for the entire loan amount, even if other borrowers default.
Q: Should I get legal advice before buying a property with friends or family?
A: Absolutely. Independent legal advice is crucial to understand your rights and obligations.
Q: What is the difference between joint tenancy and tenancy in common?
A: Joint tenancy means equal ownership and automatic inheritance rights. Tenancy in common allows for unequal ownership percentages and does not include automatic inheritance.
Q: What should be included in a co-ownership agreement?
A: The agreement should outline ownership percentages, responsibilities for mortgage payments and maintenance, and a plan for resolving disputes or one party wanting to sell.
Did you know? The Banking Ombudsman Scheme is required to undergo independent reviews to ensure fairness and transparency.
Pro Tip: Don’t rely on verbal agreements. Get everything in writing and reviewed by a qualified legal professional.
Thinking of buying with family or friends? Share your thoughts and concerns in the comments below!
