Mates urged to club together to get that elusive first mortgage
Banks are offering more deals to purchasers who choose to buy with friends or relatives. But there are pitfalls, warns Chiara Cavaglieri
Sunday 10 July 2011
Lenders have been urged by housing minister Grant Shapps to offer "mates mortgages" to encourage more first-time buyers (FTBs) into the market.
Pooling together funds to meet the current deposit demands could be an ideal way to get a first foot on the ladder. But is buying with a friend really a good idea?
For anyone unable to access the Bank of Mum and Dad, the current market is a minefield of lukewarm lenders and hefty deposits. The average age of FTBs buying without help from family has now hit 37, according to government estimates, and the average deposit reached £26,582 in the first quarter of 2011, according to the Council of Mortgage Lenders (CML).
During boom times, joint ownership mortgages were often just a way for buyers to increase their spending power, but with today's strict lending conditions, they could prove to be the only lifeline for some.
"Buying with friends or family can be a way of lowering the amount of deposit you need and sharing mortgage and running costs." says Helen Adams from Firstrungnow.com. "In some areas it may enable buyers even to leap-frog the first rung of the ladder to a larger property – but not in many. Another advantage is you have an in-built social life. In many case friends have rented together before – so why not purchase together?"
Having several people contributing to the deposit and mortgage is in many ways a straightforward way to make your first home affordable. Indeed, it could be the only way for some without having to save until they are into their thirties. As well as the mortgage itself, friends buying together get to share all of the other financial burdens such as legal fees and survey costs, which quickly add up.
The problem remains, however, that lenders are still cautious, and even if you do find a willing and affordable lender, you may not be able to borrow as much as you hope. Lenders are unlikely to consider all incomes, with many only using the top two earners to determine how much they will lend, but it is worth investigating as this will vary from one bank to another. For example, Santander will take half of the income from third and fourth applicants into account, and others may have an element of discretion to use a third income if there is only a small margin.
Britannia is another major player in this field with its "Share to Buy" mortgage. This was launched in July 2004 and allows up to four friends to buy together. The mortgage is available up to 90 per cent loan-to-value (LTV) and the building society will lend at up to 3.75 times the joint income of two applicants; for groups of more than two, it will either lend at twice all applicants' incomes, or 3.75 times the two highest earners.
"We know how difficult it can be for first-time buyers to get a foot on the property ladder. We've seen a lot of siblings or groups of friends who have chosen this type of mortgage," says James Hillon, head of mortgages at the Co-operative Bank and Britannia. "As well as making their first home more affordable it also gives a lot of flexibility – there is no limit to the overpayments they can make, plus there are no penalties or tie-ins."
Even if you don't have anyone in mind to buy with, you can find like-minded people on agencies set up to bring co-buyers together, such as Sharedspaces.co.uk, Jointequity.co.uk and Propertyfriends.co.uk.
Whichever route you take, with any joint ownership mortgage, legally you will either be "joint tenants", or "tenants in common". The former is typically suited to married couples or long-term partners, and under this arrangement neither party can sell without the other's agreement.
If one party dies, their share is automatically passed on to the remaining owner. For friends buying together it is sensible to be "tenants in common" instead, which means that each party can sell their share while alive, or have that share passed on to their estate if they die.
Although it shouldn't have any impact on the lender's decision whether you are friends or relatives buying together, it could be a factor when deciding whether joint ownership is too risky a move.
"It won't make any difference on the status of the borrowers whether they are siblings or just friends, just as there is no difference between assessment of married or unmarried couples," says David Hollingworth of the mortgage broker London & Country. "What it does highlight, though, is that the commitment is the same for all and the friends will be jointly and severally liable."
As everyone is responsible for the mortgage, if one person defaults, the rest of you have to cover the shortfall and the lender is free to chase one or all for any overdue payments. With FTBs it is perhaps more likely that circumstances will change, whether it's someone getting married, losing their job or relocating.
Furthermore, if anyone decides they want out and property prices have fallen there is a danger you could all end up with less equity, unless everyone is in a position to hold on to the property until conditions improve.
"The main issue is simply sharing with others; it is hard enough renting with a group of friends without committing yourself to something as difficult to get out of as a mortgage," says Melanie Bien, a director of independent broker, Private Finance.
With so many potential problems, it is vital to seek legal advice. A solicitor will guide you through the buying process and help arrange a declaration of trust setting out how much each person has contributed and how the equity will be split. A cohabitation agreement should also be drawn up to cover anything from responsibility for house maintenance and home insurance, to how to value the property if anyone wants to sell and any rules concerning partners or tenants moving in.
Above all, you will all need to ask each other some frank questions before making your decision.
"A mortgage should be viewed as a long-term commitment, usually over 25 years," continues Ms Bien. "But what if one of the friends meets someone and wants to buy with them – would they be able to get out of their commitment to their friends? Will the others buy out the leaver's share – and would they be able to afford to?
"What happens if one party loses their job and can't afford their share of the mortgage? The others would be liable for the shortfall, which they may ill afford."
Thomas, 26, and Christopher Akhurst, 25, London
When brothers, Thomas and Christopher, decided it was time to leave home in North Harrow, it made sense to buy together.
"I looked for maybe a year before we both started looking together," says Thomas. "I realised that to get anything decent I would have to save for a very long time on my own. After living together at home for two years when Christopher got back from university, we started looking for a place together."
The pair moved into their £235,000 two-bed flat in Ruislip, north-west London, in January with a joint ownership mortgage from Britannia. Having saved up their money while living at home, Thomas, a mechanical engineer, and Christopher, an internet analyst, were able to put down a £40,000 deposit, which they split equally between them.
For Thomas, buying with family was an easy decision and he is happy that should either want to leave, the other can buy them out and can remortgage if necessary. But he says he wouldn't have felt as comfortable making such a big commitment with anyone else.
"I can trust my brother. I know his financial background, so there aren't going to be any skeletons in the closet."
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