Buying a Home with Family and Friends - The Definitive New Zealand Guide

Our comprehensive guide explains joint ownership structures and shared mortgage arrangements, legal considerations and financial planning, benefits, risks, and essential steps to make this significant decision confidently and clearly.

Updated 16 November 2023

Summary:

Purchasing a home is a significant financial decision and milestone for many New Zealanders, but for many it takes years to put together a deposit and there are a lot of affordability roadblocks along the way.
To put it bluntly, the current state of the housing market in New Zealand is extremely challenging for those seeking affordability. It's a situation where the term 'stuffed' doesn't seem too far-fetched. With skyrocketing housing prices outpacing average income growth, homeownership dreams are becoming increasingly elusive for many New Zealanders.
This harsh reality is pushing people to consider unconventional routes, like buying with family or friends, which brings its own set of complexities. It's a market that urgently needs addressing, as it's not just a financial issue but a social one, impacting the quality of life and prospects of a significant portion of the population.
Our guide explains everything you need to know if you’re considering teaming up with friends and/or family to buy a home. As this is the first version of our guide, we welcome insights, questions and feedback – please email our research team with anything you’d like to contribute.

Know This First: What is Joint Home Ownership?

Joint home ownership refers to a situation where two or more individuals share the legal ownership of a residential property. This arrangement allows the parties to pool their resources, making it easier to afford a home and share the responsibilities of property ownership, such as mortgage repayments, insurance, repairs and maintenance, and other ongoing expenses.

Our guide covers:

Moneyhub Founder Christopher Walsh Shares His Views on the Risks of Buying a Home With Friends and Family:

"Entering into a joint home ownership arrangement with family or friends can seem like a smart shortcut to entering the property market, especially in the face of New Zealand's soaring house prices and affordability challenges. However, this path is lined with complexities and potential risks that demand careful consideration.

For those thinking about pooling resources for a home purchase, it's crucial to understand that this is more than a financial partnership; it's a long-term commitment that intertwines your financial stability with others. The initial appeal of shared costs and responsibilities can quickly be overshadowed by the challenges of managing collective financial obligations, particularly if one party faces financial difficulties.

Joint tenancy and tenancy in common, the two primary legal structures for co-ownership in New Zealand, offer distinct implications for ownership and inheritance. Choosing the right structure and drafting a robust Shared Property Ownership Agreement outlining each party's rights, responsibilities, and exit strategies is essential.

Tax implications, such as the Bright-line Property Rule, and the need for adequate insurance coverage, add complexity. Furthermore, the emotional toll and potential for conflicts over property maintenance or financial contributions should not be underestimated.

Before diving into this arrangement, consider the strength and stability of your relationship with potential co-owners. Clear communication, aligned long-term goals, and a mutual understanding of personal space and privacy are non-negotiable.

While joint home ownership can make property ownership more attainable, it's a decision that requires thorough planning, open communication, and a clear understanding of the legal, financial, and personal implications. It's not just a financial decision but an investment in a relationship that will be tested over time. Tread cautiously, and ensure all parties are prepared for the various scenarios that joint home ownership can present - the risks are too high if something goes wrong".

Understanding Essential Terms Associated With Joint Home Ownership

Any property purchase requires a lot of planning; the terms below cover borrowing money, legal, tax, insurance and selling (if you decide to do that later on). We outline what you need to know:

1. Home Loan
Unless you’re buying a home all in cash (e.g. no mortgage), you’ll need a home loan. Our resources have more details:

Home Loan Options: When buying a property with a family member or friend, it's essential to understand your mortgage options. In New Zealand, several types of loans cater to different needs:
Standard Home Loans: These loans suit individuals with stable incomes and good credit histories. They offer competitive interest rates and various repayment options.
Low Deposit Home Loans: These loans are designed for borrowers with a smaller deposit, typically 5-20% of the property value. They often come with higher interest rates and may require mortgage insurance. Low-deposit home loans are more common amongst younger New Zealanders who haven't had enough time in the workforce to get to high-income levels or to save a sufficiently large mortgage.
Interest-Only Home Loans: These loans only require the borrower to pay the interest charged on the loan balance, not repay the amount borrowed (until the end of the term). These loans are usually harder to obtain from banks but are far easier to manage and meet mortgage payments than regular mortgages.
First Home Loans: These loans make buying your first home easier and are typically underwritten by Kainga Ora.

2. Legal Structure
It's crucial to understand the legal structures available for joint ownership. New Zealand has two primary forms of co-ownership; joint tenancy and tenancy in common:

Joint Tenancy: In this arrangement, all co-owners hold equal and undivided shares in the property. The most notable feature of joint tenancy is the right of survivorship, which means that if one co-owner passes away, their share in the property automatically transfers to the surviving co-owner(s). Couples or close family members commonly use joint tenancy.
Tenancy in Common: This form of joint home ownership allows co-owners to hold separate and distinct shares in the property, which can be equal or unequal. Each co-owners share can be transferred, sold, or bequeathed independently without affecting the interests of the other co-owners. Tenants in common are often used among friends, unrelated individuals, or business partners.

You'll also need to consider getting a Shared Property Ownership Agreement, which is a property ownership agreement that outlines the rights and responsibilities of each co-owner. It's crucial to draft an agreement to protect each party's interests and avoid disputes. The agreement should include the following:

Ownership structure (touching on joint or tenancy in common as discussed above).
Ownership shares for each party.
Contributions to the deposit, mortgage repayments, and ongoing expenses.
Maintenance and repair responsibilities.
Decision-making processes.
Procedures for resolving disputes.
Guidelines for selling or transferring ownership.

3. Tax Implications
When buying a property with a family member or friend, it's essential to understand the tax implications. Some key factors to consider are:

Bright-line Property Rule: New Zealand does not have a capital gains tax, but the government introduced the "bright-line test" in 2015. This test requires income tax to be paid on any gains from residential property sold within a specific timeframe, excluding the family home or inherited property. The bright-line period was extended to ten years in 2021. The IRD’s official guidance on how the Bright-line test applies to co-ownership has further information, as does our bright-line test guide.
Income Tax Deductibility: If you’re buying a property as an investment, rental income must be declared in each co-owners annual tax return. Expenses related to the property can be deducted against this income.

4. Insurance
Adequate insurance coverage is crucial for any property purchase - being underinsured risks your investment should disaster strike. Before buying any property, you'll need to consider the following types of insurance:

Home Insurance: This type of insurance covers the building in the event of damage, theft, or loss.
Home and Contents Insurance: This type of insurance covers the building and personal belongings in the event of damage, theft, or loss.
Mortgage Protection Insurance: This type covers mortgage repayments if a co-owner cannot work due to illness.
Landlord's Insurance: If the property is rented out, landlord's insurance can provide coverage for loss of rent, tenant-related damage, and legal expenses.

5. Exit Strategy
Ensure you have an exit strategy before buying with family or friends. Before buying a property with a family member or friend, discussing and agreeing on an exit strategy is essential. Circumstances can change, and having a plan in place can help mitigate potential conflicts. Some common scenarios include:

One co-owner wants to sell their share: The shared property ownership agreement should outline the process for valuing the property and finding a suitable buyer. It could also include a right of first refusal, allowing the remaining co-owner(s) to buy the share first.
One co-owner cannot meet their financial obligations: The agreement should specify the steps to be taken in this situation, such as allowing the other co-owner(s) to cover the costs temporarily or forcing the sale of the property.
Relationship breakdown between co-owners: The agreement should include a dispute resolution process and provisions for dissolving the co-ownership arrangement.

Buying a Home with Friends or Family Members - Understanding the Pros and Cons

Buying a home with friends or family members can be an attractive option for several reasons:

1. Affordability

By pooling your financial resources together, you'll be able to accumulate a larger deposit (and therefore afford a larger or better-located property) than what you could buy on your own.
Sharing the deposit costs, mortgage repayments, and ongoing expenses can make homeownership more accessible and manageable than just buying a property alone. Additionally, it acts as a form of diversification in case one of you loses your job.

2. Shared responsibilities

Owning a home involves various responsibilities, such as maintenance, repairs, and mortgage payments. By purchasing a property with friends or family members, you can divide these tasks among the co-owners, making the process more manageable and less time-consuming for each individual.

3. Getting on the property ladder earlier

Buying a property with family or friends can mean that you can get on the property ladder far earlier than buying a property alone. A joint home purchase can be a smart investment strategy, as property values generally appreciate over time.
In addition, by sharing the ownership, you and your co-owners can benefit from potential capital gains and rental income (if the property is rented out) far earlier than if you were to buy on your own.
Know This: The hard reality of New Zealand's housing market is that first time buyers continue to have it tough, as explained in this August 2023 article from interest.co.nz. Teaming up with a friend or family member is, for many, the only way to have a chance of buying a house.

4. Emotional support

While home ownership can be incredibly valuable and worthwhile, it comes with much stress and effort. Buying a home isn't just a significant financial decision but an emotional one too. Sharing this experience with trusted friends or family can provide valuable emotional support and make the process more enjoyable.

However, there are risks and disadvantages:

1. Financial risk

When entering a joint property ownership arrangement, co-owners are financially interdependent. For example, if one party encounters financial difficulties or defaults on their mortgage payments, the other co-owner(s) may be liable for the outstanding debt.

2. Disagreements and conflicts

Co-owning a property can lead to disagreements and conflicts over various issues, such as property maintenance, financial contributions, and decision-making. Therefore, it's crucial to have a robust shared property ownership agreement in place to help manage and resolve disputes.

3. Changes in personal circumstances

Life events such as job loss, marriage, divorce, or having children can impact the co-ownership arrangement. These changes may necessitate renegotiating the property ownership agreement or implementing an exit strategy. Ensure your shared property ownership agreement has specific provisions for these instances so each co-owner knows what to expect.

4. Reduced personal space and privacy

Depending on the property's layout, living with a family member or friend (assuming the co-owners choose to live in the property they purchased) may result in reduced personal space and privacy.
While this may be fine for friends with no dependents, this may not work for multiple families with children. Therefore, it's essential to consider whether the co-ownership arrangement suits your lifestyle and needs.

What other factors should I consider before diving into co-ownership?

Relationship dynamics: Before entering a joint property ownership agreement, honestly ask yourself how strong your relationship is with your potential co-owner. It's one thing to care for and support a family or friend, but it's another to invest a substantial portion of your net worth alongside this person. Therefore, assessing the strength and stability of your relationship with your co-owner is essential. A strong, trusting relationship is crucial for successful co-ownership.
Communication: Open and honest communication ensures a successful co-ownership arrangement. If you decide to co-invest with a family member or friends, ensure you're comfortable regularly discussing finances, property maintenance, and other responsibilities to avoid misunderstandings and conflicts.
Long-term goals: Consider your long-term goals and whether joint property ownership aligns with your plans. For instance, if you plan to move overseas or start a family soon, it may not be the right time to enter a joint property agreement.
Property management: If you intend to rent out the property or a portion of it, consider the logistics of property management. Will one of the co-owners take responsibility for managing the property, or will you hire a property manager? Be sure to outline these responsibilities in the property ownership agreement.

Must-Know Facts When Considering Joint Home Ownership

1. Make sure to review the property ownership agreement regularly

Life circumstances can change, and it's crucial to revisit the property ownership agreement periodically. This periodic review ensures that the agreement remains relevant and accurately reflects the co-owners current financial contributions, responsibilities, and preferences.

2. Set up a joint bank account for property expenses

Consider setting up a joint bank account to simplify the management of property-related expenses. Each co-owner can contribute a pre-agreed amount to this account regularly, covering mortgage repayments, property maintenance, insurance premiums, and other ongoing costs. Separating your property finances into a separate bank account ensures that you've got a clear trail of payments and will help to prevent confusion when splitting mortgage payments, maintenance or insurance payments.

3. Maintain transparency in financial matters

Openness and transparency in financial matters are critical to maintaining the relationship with your co-investors and avoiding disputes. Ensure all co-owners can access mortgage statements, property-related bills, and other relevant financial information. If one of you thinks you might get into financial troubles in the near term, make sure that you're all aware and comfortable sharing these details as soon as possible (as the impact of this will be felt by all of you).

4. Establish boundaries and respect personal space

Depending on the living arrangements, establishing boundaries and respecting each co-owners personal space might be necessary. Discuss and agree on rules for communal areas, quiet hours, and visitors to maintain a harmonious living environment (similar to living with flatmates).

5. Seek mediation if disputes arise

Despite the best intentions and preparation, disputes may arise between co-owners. In such cases, seeking mediation advice to help resolve the conflict and preserve the relationship can be beneficial. Regarding rights and obligations, ensure you're fully aware of the laws you must follow as a landlord.

This guide to mediation gives you the opportunity to settle disputes without taking them to court, is a helpful starting point. If you later consider court options, the guide has more details about the trade-offs, costs, why you would, and when it makes sense etc.

6. Be prepared for unexpected events

Life is unpredictable, and unforeseen events can impact your co-ownership arrangement. Ensure that you (and your co-owners) have an emergency fund and insurance policies to cover any unexpected expenses or changes in circumstances.

7. Celebrate milestones and achievements

Joint property ownership can be a tough journey, so it's essential to celebrate milestones and achievements along the way. Whether paying off a portion of the mortgage, completing a home renovation, or enjoying a positive return on investment, acknowledging your accomplishments can strengthen your co-ownership relationship.

8. Don’t take joint ownership lightly

Just like how buying a home is a huge financial decision, deciding to co-invest alongside a friend or family member is just as significant. The decision to purchase a home with a family member or friend is not taken lightly. By co-investing with another third party, you're effectively joined at the hip regarding any decisions affecting the property. Make sure you consider the quality of the person you're buying the home alongside. You're not just buying a house - you're making a substantial investment into an asset and a relationship with a specific person/third party.

Common Questions for Anyone Considering Joint Home Ownership

Frequently Asked Questions

Our list of common questions below is limited - if you have any questions or don't understand something, make sure you understand before signing any document.

If I have a bad credit history, can I buy a home with a family member or friend?

Buying a home with a family member or friend may be possible if you have a bad credit history, but it could impact the mortgage application. Lenders assess the credit history of all applicants when determining loan eligibility and interest rates, alongside affordability (e.g. how much you earn vs how much you spend). Having a co-borrower with good credit could help offset the impact of bad credit, but it may still result in higher interest rates or stricter lending conditions.

How do we determine the value of each co-owners share?

Each co-owners share value is typically determined by their financial contributions to the property purchase and ongoing expenses. These contributions should be outlined in the shared property ownership agreement. When selling or transferring ownership, it may be necessary to obtain an independent valuation to determine the current market value of the property.

How does buying a property with a family member or friend affect my eligibility for government grants or schemes?

Eligibility for government grants and schemes, such as the First Home Grant or the First Home Loan, depends on individual circumstances and the specific criteria of each programme. For example, when buying a property with a family member or friend, your eligibility may be affected if one or both parties have previously owned a home, exceed income or asset limits, or do not meet other requirements.

Can we rent out a portion of the property to help cover mortgage repayments and expenses?

Renting out a portion of the property can effectively generate income and cover mortgage repayments and expenses. However, it's important to consider the tax implications of rental income and ensure that local zoning laws and property covenants permit this arrangement. Additionally, the shared property ownership agreement should outline the responsibilities and income distribution related to renting the property.

What happens if one co-owner dies?

If one co-owner dies, their share of the property will be distributed according to the ownership structure.

In a joint tenancy, the deceased's share automatically passes to the surviving co-owner(s).
In a tenancy in common, the deceased's share is distributed according to their will or intestacy rules.

It's essential to consider these scenarios when drafting the property ownership agreement and ensure that all co-owners have appropriate estate planning.

‘Bank of Mum and Dad’ Considerations

It’s common in New Zealand for family members to help others out when it comes to buying a home. However, many people are uncertain about how to proceed. We suggest reading this resource for more information.

If you’re considering giving a family member some money to help them buy a house, most people in a similar situation want to strike the right balance between helping out family members and not giving up too much. The two main factors you’ll need to consider are:

The method of support (e.g. gifting money for the deposit, co-investing, acting as a guarantor to the property, etc.)
The main implications of your support (bright-line test, family trust options, tax implications, eligibility criteria for other incentives etc.)

The main steps you'll need to take to help you achieve a balance between helping out a family member and not giving up too much include:

Assessing your financial situation: Before agreeing to provide a house deposit, evaluate your current financial position and ensure you can afford to part with the funds without compromising your financial goals, retirement plans, or emergency savings.
Determine a comfortable amount to provide: Decide on a specific amount or percentage of the deposit you feel comfortable providing. This amount should not jeopardise your financial well-being or create undue pressure on your finances.
Decide whether you want a loan or a gift: Determine whether you want to provide the deposit as a gift. If you offer it as a loan, establish clear terms and conditions, including interest rates, repayment schedules, and any collateral. If you decide to give the deposit as a gift, be aware that you may lose control over the funds and may not have a say in how the money is used or repaid.
Establish clear expectations with your family member: Communicate your expectations to your family member, including any repayment terms, responsibilities, and potential consequences if the terms are not met. This clarity can help prevent misunderstandings and conflicts in the future.
Put everything in writing: Regardless of whether you choose to provide the deposit as a loan or a gift, it is essential to have a written agreement outlining the terms and conditions. This documentation can serve as a reference point and help resolve any disputes.

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