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Tricks and mortar

Can new online fractional investing sites let you help your kids and grandkids onto the property ladder via co-ownership of property?

Housing affordability is an issue that’s impacting more than just younger generations of Australians. Retirees are also feeling the effect as they look for ways to help their children onto the housing ladder.

In Australia’s biggest capital cities, Sydney and Melbourne, buying a house requires people to pay up to almost 13 times and almost 10 times their annual income respectively, according to a recent survey by Demographia.

The data, which puts the two Australian capitals in the top five of the world’s least affordable cities, is based on a median house price of $1,177,600 and a median income of $91,600 in Sydney and $817,000 and $82,800 in Melbourne.

The challenge of getting a foothold in the residential property market has led to the launch of a number of online platforms, such as BrickX and CoVESTA, in the past two years. These platforms offer people the chance to invest in a “fraction” of a property via a unit trust structure.

More recently, another online platform, Kohab, is aiming to smooth the way for families and friends who see co-ownership as an opportunity to get a foot onto the housing ladder.

The co-ownership model

As well as allowing potential co-owners to search for properties, Kohab’s various partners provide solutions to help them navigate some of the trickier areas of co-ownership, including a standardised legal agreement developed by legal firm Sparke Helmore; housing finance; and insurance.

David Dawson, CEO and co-founder of Kohab, says: “We started this because we could see affordability and (loan) availability were locking people out of homes.”’

It offers an alternative to people putting up deposit money and their own home or property as security to help their children into the property market. In that situation, the children still don’t own a portion of the asset themselves.

“There are smart ways to do this where children can buy with their parents and they all own a portion of the asset,” Dawson says.

Key to making such arrangements work is putting in place a legal agreement between the parties. It can outline the rules, regulations, and conduct that co-owners agree on when they enter the arrangement, and it’s a great way to facilitate a conversation between all the potential co-owners early in the process. It will also help the parties to get clear on any exit strategy.

Dawson recommends that the agreement include a sunset clause. “Having a sunset clause built in at about the five-year mark allows people to set a period of time they are going to hold the co-owned property and then as a group they are going to sell it on the open market,” he says.

Or they may agree that Party A will sell to Party B, or to a third party. “There are numerous ways in which it can be structured,” he says.

The co-ownership model of accessing the residential property market is made possible by loan products that hold each party responsible for their part of the loan only. This means individuals do not have to guarantee their co-buyers’ mortgage repayments, and if they are only buying 25 or 50 per cent of the property, their deposit and repayments will be based on the same proportion.

For the situations that can’t be covered in the agreement – such as one party’s inability to cover their repayments – the platform provides access to an insurance policy.

It would cover co-owners for the unlikely event that one of their fellow co-owners passes away or loses their job. “The policy kicks in, allowing the parties to maintain their payments for six to 12 months, depending on the extent of the insurance product,” he says.