Today it’s common for couples to purchase a property before they’ve walked down the aisle or even lived together.
Naturally they assume they’ll be together forever, and don’t put a lot of research into the long term consequences of how their ownership should be structured.
So to help better understand this, let’s take a look at the law surrounding property ownership.
In Australia, if you’ve bought a property with your partner there are two ways your ownership could be described. You have entered into either a joint tenancy or a tenancy in common agreement.
Either way you end up owning a share of the property but the two different structures determine that and have very different consequences depending on which agreement you choose.
The nuts and bolts of joint tenancy
Let’s start by explaining joint tenancy because it is by far the most common agreement that couples enter into.
Joint tenants own the whole property “jointly” (together) equally and the interests of one party are not separate or distinct from the other.
This is regardless of who the main contributor to the deposit or the mortgage is. For example, in a joint tenancy, one partner may start earning more and hence be paying more off the mortgage but this does not increase their stake in the asset.
A joint tenancy has no severable share, which means if one of the partners passes away, the surviving partner automatically receives ownership of the property.
This also means they’ll also incur full responsibility for the outstanding debt.
The joint tenancy, therefore, is all about equality and lenders will treat the couple as one person, or one mortgagee.
This also means that from an estate planning perspective, you can’t leave your share in a jointly owned property to your beneficiaries.
Tenancy in common
On the other hand, if you own your property as tenants in common, you own a separate and distinct individual share in the property.
You could own an equal 50% share or in any other proportion.
For example, you may choose to only contribute $25,000 of the $100,000 deposit and pay 25% of the mortgage. In this case, you’ll be entitled to 25% of the asset, while your partner holds the other 75%.
These percentages are described on the Certificate of Title, and if no percentages appear on the Title, it is deemed that the property is held as tenants in common.
If you separate from your partner, under a tenancy in common agreement you maintain your share of the property. In the event your partner dies while in a tenancy in common arrangement, their share doesn’t automatically default to you, but rather is delegated in accordance with their will.
That’s why if you’ve entered into a tenancy in common arrangement and have split from your partner, make sure you update your will.
But there is a little hitch: the banks don’t see it that way.
Your mortgage under tenancy in common is typically a shared responsibility – what the banks call joint and several liabilities between all parties.
This means if one person defaults, then the other will need to make up the repayments.
When do you decide which way to go?
The best time to decide how you are going to own your property is when it is purchased, but you’re likely going to have to instruct your solicitor or conveyancers, as most seem to assume you’ll automatically purchase as joint tenants.
If you’re unsure which structure is right for you seek advice as there are equally good reasons to own property as joint tenants or as tenants in common.
I see people choosing to be tenants in common in the case of second marriages where there are children from a first marriage or when they want to split the tax deductibility of mortgage payments between the higher and lower income spouses.
So now you understand the difference, you’ll realise the importance of seeking advice, or at least considering how the asset should be held before purchasing your next property.
Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.