What can you do if your co-owner is not paying the mortgage?

Co-owning a home with someone else comes with many advantages. You can divide the upfront costs of the purchase and the ongoing expenses for the property. But you may have to deal with certain problems, like if the co-owner is not paying the mortgage. 

To help you navigate this possibility, you should know your rights and how you can buy out your co-owner.

What should you do if your property’s co-owner is not paying the mortgage?

Purchasing a property with a friend or family member as co-owners can be smooth sailing until the other owner stops paying their share of the mortgage. 

If the co-owner is facing financial hardship, such as from a job loss, you should get in touch with your lender as soon as possible. Explain the situation to your lender and that you may not be able to make the full repayments on your own.

Once you’ve explained the situation to your lender, they may allow you to enter into a hardship support agreement. The lender could pause your repayments or reduce the regular repayment amount, even if it’s only for a short period. 

In a hardship situation, the lender may extend the loan term, or suggest you switch to an interest-only loan for a limited time. Keep an eye out for arrangements where your loan repayments are paused, but your loan term continues, as not reducing your loan principal for even a short period will mean your next repayments are higher. 

If the co-owner is refusing to make repayments for reasons outside of financial hardship, you should still get in touch with the lender as soon as possible. Late or missed mortgage repayments can result in a black mark on your credit report and a reduction to both of your credit scores. If you let the lender know what’s going on, you may get a little breathing room to make new arrangements. 

But, no matter what you or the co-owner may be going through, you’ll still have to find a way to continue repaying the home loan. Otherwise you’ll have to consider buying them out, or sell the property. 

How do you buy out your property’s co-owner?

If your property’s co-owner is not paying the mortgage, get in contact with legal support so you can understand your ownership rights and the overall ownership structure. At this point, you may want to part ways with the co-owner and buy out their share of the property. 

The process of buying out a property’s co-owner is a two-fold process:

1. You calculate the amount you need to pay them; and
2. You refinance the home loan so that you are the sole owner on the property title. 

However, as far as the ownership structure is concerned, it’s not always a simple 50/50 split. The overall co-ownership structure may vary depending on how you’ve set it up when you made the purchase. 

There are two ways that you may purchase property with another individual:

• Joint Tenants - You would own equal shares in the property. 
• Tenants in Common - Property ownership may be split differently, such as 60/40 or 70/30.

You’ll need to identify which arrangement your mortgage is, and then assess the amount you both paid for the deposit, stamp duty, and ongoing repairs and maintenance. The repayments that the co-owner did make go towards the equity in the home, and will likely need to be paid out as well.  

To estimate how much it may cost to buy out your co-owner, you’ll have to calculate the property's current value and the amount you both paid in upfront and ongoing costs. You can then deduct the mortgage balance from the property’s assessed value and divide the figure according to the ownership ratio listed on the mortgage as a starting point. 

There will likely be a range of other factors involved in setting the price for buying out a co-owner’s share, so it’s best to consider contacting a legal professional before preparing an agreement.

Buying out a co-owner and taking sole ownership of a property will also involve refinancing the mortgage, so you can be listed as the sole owner on the property title. You may also have to pay for stamp duty or Lender’s Mortgage Insurance (LMI)again, which can be tens of thousands of dollars - depending on the loan-to-value ratio and property value. 

• Note: If a divorce is the main reason for the dissolution of the partnership, then you may be responsible for capital gain tax (CGT). But, if you continue residing in the house after separation, you wouldn’t be liable for the tax when you sell the property, as it’s your main residence.

What to consider before buying a property as a co-owner

If you plan to buy a property with friends or family as Joint Tenants, it may be wise to enter into a co-ownership agreement. This will mean setting out the rights and obligations of each of the owners ahead of time, leaving little room for additional stress and arguments if a separation occurs. 

A legal professional can help you draw out a sufficiently broad agreement. You’ll want something covering potential issues, such as if either of you wants to sell, and the rights of the innocent parties if a co-owner is not paying the mortgage. 

The co-ownership agreement will also generally cover how one party can buy out others under various circumstances. Setting this out at the start could help settle disputes between the co-owners amicably.

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