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

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."

Case Study

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."

PROMOTED VIDEO
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Software Development Manager

    £40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...

    Ashdown Group: Product Manager - (Product Marketing, Financial Services)

    £30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

    Recruitment Genius: Compliance Assistant

    £13000 per annum: Recruitment Genius: This Pension Specialist was established ...

    Ashdown Group: Market Research Executive

    £23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

    Day In a Page

    Isis hostage crisis: The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power

    Isis hostage crisis

    The prisoner swap has only one purpose for the militants - recognition its Islamic State exists and that foreign nations acknowledge its power, says Robert Fisk
    Missing salvage expert who found $50m of sunken treasure before disappearing, tracked down at last

    The runaway buccaneers and the ship full of gold

    Salvage expert Tommy Thompson found sunken treasure worth millions. Then he vanished... until now
    Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

    Homeless Veterans appeal: ‘If you’re hard on the world you are hard on yourself’

    Maverick artist Grayson Perry backs our campaign
    Assisted Dying Bill: I want to be able to decide about my own death - I want to have control of my life

    Assisted Dying Bill: 'I want control of my life'

    This week the Assisted Dying Bill is debated in the Lords. Virginia Ironside, who has already made plans for her own self-deliverance, argues that it's time we allowed people a humane, compassionate death
    Move over, kale - cabbage is the new rising star

    Cabbage is king again

    Sophie Morris banishes thoughts of soggy school dinners and turns over a new leaf
    11 best winter skin treats

    Give your moisturiser a helping hand: 11 best winter skin treats

    Get an extra boost of nourishment from one of these hard-working products
    Paul Scholes column: The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him

    Paul Scholes column

    The more Jose Mourinho attempts to influence match officials, the more they are likely to ignore him
    Frank Warren column: No cigar, but pots of money: here come the Cubans

    Frank Warren's Ringside

    No cigar, but pots of money: here come the Cubans
    Isis hostage crisis: Militant group stands strong as its numerous enemies fail to find a common plan to defeat it

    Isis stands strong as its numerous enemies fail to find a common plan to defeat it

    The jihadis are being squeezed militarily and economically, but there is no sign of an implosion, says Patrick Cockburn
    Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action

    Virtual reality: Seeing is believing

    Virtual reality thrusts viewers into the frontline of global events - and puts film-goers at the heart of the action
    Homeless Veterans appeal: MP says Coalition ‘not doing enough’

    Homeless Veterans appeal

    MP says Coalition ‘not doing enough’ to help
    Larry David, Steve Coogan and other comedians share stories of depression in new documentary

    Comedians share stories of depression

    The director of the new documentary, Kevin Pollak, tells Jessica Barrett how he got them to talk
    Has The Archers lost the plot with it's spicy storylines?

    Has The Archers lost the plot?

    A growing number of listeners are voicing their discontent over the rural soap's spicy storylines; so loudly that even the BBC's director-general seems worried, says Simon Kelner
    English Heritage adds 14 post-war office buildings to its protected lists

    14 office buildings added to protected lists

    Christopher Beanland explores the underrated appeal of these palaces of pen-pushing
    Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

    Human skull discovery in Israel proves humans lived side-by-side with Neanderthals

    Scientists unearthed the cranial fragments from Manot Cave in West Galilee