By Jill Fraser for Lending Central

The CBA and Mortgage Choice have both jumped on the bandwagon this year with a focus on tenants in common and it’s anticipated that RAMS, which is currently “looking into the issue”, will soon follow suit.

Jeremy Levitt, Director PodProperty, a company that facilitates co-ownership agreements, says stricter lending criteria and insecurity about employment are powerful catalysts for co-ownership arrangements.

Property co-ownership refers to a situation where two or more people share the ownership of a property. Put simply, it entails:

• Pooling your money with others to put a deposit down on a home;
• Combining your borrowing power to borrow the rest from a loan provider;
• Paying off the mortgage on your home instead of paying rent (for Owner Occupiers) or earning a stream of rental income (for Investors);
• Having the flexibility to move out or sell out if you need or want to.

PodProperty is witnessing a 12% to15% growth month on month and the figure is escalating. This is due in part to a number of excellent distribution deals - partners include the Commonwealth Bank, Mortgage Choice, Wizard Home Loans and Defence Housing Australia.

PodProperty statistics reveal that 61.3% of co-owners purchase a home to live in; 30.5% purchase as investors; 4.3% buy a holiday home and 2.5% purchase a commercial property. The remaining 1.00% is a combination of rural dwellings and communes.

The CBA’s new product, Property Share a mortgage product that has a lot of bells and whistles suitable for co-owners means that finances can remain separate - repayments can be made out of separate bank accounts - and co-owners can choose a range of separate arrangements such as fixed or variable - different risk profiles are catered for depending on the appetite of the individuals.

“When lenders don’t have a product suitable for co-owners those involved have to jump through additional hurdles,” says Levitt.

“Lenders used to make potential borrowers feel that what they were doing was atypical. But having a product come onto the market that specifically targets and suits the needs of co-owners makes them feel more comfortable and confident.”

The issue of joint and several liability for each other’s debts still applies. Levitt hopes in time that lenders will create more flexibility around this but admits it’s hard to imagine what else they could do because without this joint financial commitment lenders could not enforce the security.

“If two people borrow 100% and are not jointly and severally liable if one co-owner fails to make a payment the lender will need to step in a sell the property and for this would need the consent of the other co-owner,” he says.

PodProperty draws up Co-Ownership Agreements in which each co-owner has a Power of Attorney in each other’s favour, which gets triggered if one of the co-owners defaults.

The primary reason co-borrowers get a co-ownership agreement is to prevent the group purchase turning sour.

Without a co-ownership agreement, it can be very costly to litigate what was intended to occur between the co-owners in the case of one needing to sell out or one party defaulting under their finance. A co-ownership agreement is the most important factor in any group purchase.

If one party defaults on their mortgage repayments and the other parties do not step in to pay the amount due, this will affect the credit ratings of all co-borrowers, as they have joint and several liability.

Parties can mitigate the risk of default by ensuring their co-ownership agreement has a robust default procedure.

PodProperty’s Co-ownership Agreement has a default regime that protects the non-defaulting party in the following way:

• The defaulting party has a grace period after failing to pay their mortgage payment in which the non-defaulting party steps in to cover payment. If this occurs the defaulting party owes the non-defaulting party the missed mortgage payment as a debt with penalty interest accruing daily.
• If the defaulting party missing a second payment, the non-defaulting power receives a power of attorney to do to do whatever they want with the defaulting party’s share of the property. For example, they can refinance it or sell the defaulting party’s share of the property with all costs associated with such default coming out of the defaulting party’s share.

Levitt says it’s imperative that property co-owners are protected by a Co-Ownership Agreement. He urges brokers to ensure that their clients have sought legal advice.