What’s in a property title, and why might it make my bank twitchy?

Sunday, 5 November 2023

The apartment looked too good to be true for a first-time buyer.

The property listing looked too good to be true… a two-bedroom apartment in Auckland, minutes from Queen St, with a large living room that opened through louvre sliders onto a broad, shaded balcony.

Below, the complex's pool shimmered in the Auckland sun, surrounded by yellow deck chairs just calling out to me to come spend an afternoon lazing on them while I read a book. Absolutely dreamy.

The home even came with an enclosed car park, and access to a small gym. And the cost? $650,000.

I had visions of myself beside the pool on a lazy afternoon. Alas, it was not to be.

I got onto the agent straight away. Which is how I was reminded that, when it comes to property, if something looks too good to be true, that’s usually because it is.

“It’s a unit title,” the agents said, sounding a little like she’d fielded this call a couple of times already and hated to deliver the bad news again. “It would be no good for first-time buyers because of the body corp levy, which the bank’s not going to like.”

There’s always a catch, and when it comes to property titles, it’s often the body corp fees.

It turns out the property’s annual levy was an eye-watering $17,000. While that covered building maintenance and up-keep of the common areas, such as the pool and gym, it didn’t cover the rates, and could be increased in the event significant work was needed to the building.

Any bank loaning on the property would likely require a deposit of 50% or more, the agent explained.

Different kinds of titles come with different rules, obligations, costs, and complexities.

“This kind of thing is really for down-sizers who don’t need much of a mortgage.”

It turns out, not all property titles are created equal, and some might even be out of reach, or more difficult for a first-time buyer. So here’s a brief guide to understanding property titles in Aotearoa New Zealand.

The nitty gritty

A title is a way of owning property, different kinds of titles come with different rules and obligations, and come with different costs and complexities.

When you buy a home your lawyer will draw up the record of title, which will be kept at Land Information New Zealand (LINZ). A current record of title will include the name of the owner, a legal description of the property, registered rights and restrictions (for example, whether the property is mortgaged), and a map of the land, with boundaries.

In Aotearoa, leasehold, freehold, unit title, and cross lease are the most common types of titles. Another you might come across, which is uncommon these days, is a company share.

For more detailed information about titles in Aotearoa, see the government-run property site, settled.govt.nz.

Unit Titles

Mortgage broker Ash Shergill, of Shergill Mortgage Brokers, warns that body corporates aren’t cheap.

Usually found in apartment blocks, unit titles can sometimes be a little challenging, so challenging they have their own act governing them, and an entire website to explain them.

Susan Edmunds speaks with four mortgage advisers what how best to prepare yourself financially when buying a home.

Unittitles.govt.nz explains the Unit Titles Act of 2010 in detail, outlining the rules and guidance around buying and selling unit titles, how body corps should work, and what the unit owners' responsibilities are.

When you buy a unit title, you are buying a small piece of a larger entity. You own it outright, and don’t need to pay rent to anyone, but you will need to pay a levy for the upkeep of, and usually insurance on, the building. How much the levy will be is determined by the Body Corp at annual meetings you will be entitled to attend and vote in.

“From a lending standpoint, a body corp is an added expense,” says mortgage broker Ash Shergill. “So when a client is purchasing a property that has a unit title, we need to disclose to the bank that there is a body corp involved and what those costs are. That's added to the overall expenses because you've still got to pay the rates on the property, and the body corporate as well, and those body corporates aren't cheap.'

Shergill says if you are keen to buy a unit title, it is crucial you get a year’s worth of the body corp’s AGM minutes for your lawyer to check over as part of your due diligence. This should show if there has been any deferred work you may end up paying for in the future, or if any work is planned that could require an increase in the levy.

Company Share

This is an older form of flat ownership, where, in order to subdivide properties, a company was created to own the property, and buying a flat or apartment meant you bought shares in the company. These are rarely, if ever, created today, but historic company share titles will pop up for sale from time to time.

They have the same issues for first-time buyers as unit titles in that there will be a levy you must pay.

Banks often require a much higher deposit – sometimes up to 60% – to lend for a unit title or company share.

Buying a unit tile or company share means your outgoings will be your mortgage, body corp or company levy, rates, and contents insurance.

Selling also comes with specific rules and obligations you should know about before buying.

Leasehold

More common overseas in places like the UK, where leases can be for 100 years, buying a leasehold property means you are buying the buildings on the property, and the right to use the land according to the limits of the agreement, for the duration of the tenancy. You do not own the land.

You will also be required to pay ground rent. How much that rent is, and how frequently the rent is raised, will be covered in your lease agreement.

When you buy a leasehold, you will be able to sell it, as you would any other property. However, leases often come with time limits, and that could devalue the home the longer you live in it.

Buying leasehold means your outgoings will be mortgage, ground rent, rates, maintenance and house and contents insurance. You might also need to seek approval for any changes or development of the property.

Cross Lease

A cross lease is common where a section has not been subdivided, but may have several dwellings on it, for example where there is a duplex, or a second dwelling added behind the first.

It means you own a share of the freehold title, and the leasehold on your part of the property. Usually this works out to be more simple than it sounds – you own your land and house, but you might also share a driveway, or common garden with your nearest neighbour.

Buying a cross lease means your outgoings will be mortgage, rates, maintenance, and house and contents insurance. There’s no body corp, it will be up to you to negotiate maintenance of any shared areas, such as the driveways, directly with your neighbour(s).

Freehold or Fee Simple

This is the most common form of land ownership in New Zealand and it simply means you own the land and everything on it, up to and including the boundary line, as detailed in the title.

When you request or are provided with a LIM report, as part of your due diligence, it should include a certificate or record of title, so your lawyer can check the boundaries are correct and you’re not being misled by the agent’s pictures.

Buying a freehold home means your outgoings will be mortgage, rates, maintenance, and house and contents insurance.