Should I Take Out A Joint Mortgage With A friend?

Due to spiralling house costs many prospective homeowners are rightly analysing the options available to them in terms of getting onto the property ladder. One of these options is taking out a joint mortgage with a friend or family member. We have listed some of the pros and cons of joint mortgages that you may want to consider.

Property Ownership Options

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It’s very important that you define your rights and responsibilities when taking out a joint mortgage and look into how you can protect your interests.

When you buy a property, you will need to register all the owners with HM Land Registry. But there are two types of joint ownership you can register: 'tenants in common' and 'joint tenants'. Each works quite differently.

When you buy a property with other people, you need to choose how it’s going to be owned – this is usually as Joint Tenants or as Tenants in Common.

 

Joint tenants

As joint tenants, each person has a 100% stake in the property's value.

(This option may be suitable if you’re married or in a long-term relationship with the person you’re buying with.) In most cases it means you each:

  • Have equal rights to the property
  • Can claim an equal share in any profit made if the home is sold
  • Will automatically inherit the property if the other person dies
  • Must all agree if you want to sell the property
  • You may have to seek a court order if you want to sell and the other owners don't
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Tenants in common

As tenants in common, you can all own a separate share of the property, and these shares don’t have to be equally sized. (This option may be suitable for people who are teaming up with friends or family members to buy a home.) It means you:

  • Can each own a different share of the property
  • Won’t automatically inherit the property if the other tenants die
  • Can choose who to leave your share to in your will
  • Must all agree if you want to sell the property
  • You may have to seek a court order if you want to sell and the other owners don't

If you choose to be tenants in common, you are best advised to make a Will setting out your wishes and you should also consider asking your solicitor to set up a declaration of trust.

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Declaration of Trust

This declaration of trust for tenants in common records each person's contribution and therefore the proportions of the property they own. A declaration of trust can also record contributions to mortgage payments and maintenance. 

Creating this declaration of trust when purchasing is important when the property is sold as it ensures that each homeowner gets a fair portion of what they put into the property. It can also help avoid any disputes in the future and can set out clear instructions as to what will happen if the property is to be sold, in the event of a relationship breakdown.

Our specially selected conveyancing partner Mullis & Peake can advise you on this whilst going through the conveyancing process.

 

The Pros of joint ownership

 

1.     You can split the initial costs of buying a property 

Sharing the cost can make getting on the housing ladder more affordable. For instance, deposit, conveyancing costs and mortgage fees can be shared amongst you. This may allow you to buy a more desirable property in a more attractive location and allow you to get on the property ladder at a quicker pace as you will now only have to save a part of all the funds.

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2.     You can split the costs of maintaining the property

Once you move in, you'll also be able to share the cost of maintaining the property and bills such as council tax, water, electricity. You may also be able to shorten the term of the mortgage, therefore saving interest and paying a lower mortgage amount each month.

 

3.     Affordability/larger mortgages

The issue many first time buyers have is that they do not earn enough to get a big enough mortgage. One major advantage is that the combined income of each person is taken into consideration when assessing the total sum to be loaned. Meaning you will be able to qualify for a larger mortgage, and hence a larger home. However, bear in mind that even though some lenders will allow four people to take out a mortgage together, many will only take the earnings of two of them into account when calculating affordability.

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4.     Buy to Let property

Many lenders allow multiple applicants on a buy to let mortgage, often up to four and sometimes more, however, it is worth noting that Buy to Let mortgages are not always available to first time buyers.

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NB. You cannot get a buy to let mortgage on a property being purchased via Help to Buy.

Please fill out this form if you would like more guidance on this from a mortgage adviser.

 

5.     Equity gains

The longer you own the property and make mortgage payments, the more equity you gain, depending on market conditions. You can then split these equity gains between co owners and purchase a place of your own. Equity is the difference between your property’s value and outstanding mortgage that you owe the lender.

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E.g.

  • Original purchase cost: £100,000
  • Deposit: £10,000 (10%)
  • Mortgage: £90,000 (remaining 90%)
  • Equity: £10,000 (If the property was to increase in value by £50,000 to £150,000 and you have paid off £5000 of the mortgage, the equity you hold will increase to £65,000) 

PC Note:

We’ve always been firm believers that teaming up with friends is a great way to get onto the property ladder if you can’t do so by yourself. One trail of thought is that you partner up with someone, buy a place together, live there for a while, build your equity, then remortgage or sell and go and get your own place or invest again together.

The Cons of Joint Ownership

 

1.     Credit of all will be taken into account

The credit record of each person is taken into consideration and can have a detrimental impact on your ability to get a mortgage approval. It is important to note that if one person’s credit rating was to take a turn for the worst after purchasing the property you may have difficulties refinancing in the future (if you wish to do so)

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Lenders may recommend that you try to get the loan based only on the credit and income of the individual(s) with the best credit rating. If you choose to do this, you can still have both names listed on the title, which will mean you are still joint homeowners, however, the amount loaned will only be based on that/those individual(s) salary.

 

2.     Everybody is responsible for payments

Everyone named on the mortgage is responsible for the mortgage payments, so if one co-owner defaults on payments, everybody is liable. Make sure you trust whoever you are partnering with and you are all open and honest about any potential cash flow problems that might impact on you meeting the collective mortgage repayments going forward.

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3.     One or more of you may wish to sell before the others

If there is a change of circumstances, you; or one of the other co-owners of the property may want to leave the joint mortgage. Sometimes this will be amicable for example a co-owner may be leaving to live with a new partner and sometimes less so, for example, an acrimonious divorce.

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Again, if you hold the property as tenants in common and have a declaration for trust, this could clearly set out how the shares in the property may be split and how the joint ownership should be bought to an end which could help to avoid a dispute.

PC Note:

If the remaining co-owners intend to stay in the property, your lender will require you to take on the out-going borrower’s share of the mortgage and transfer the property into your sole name. This is subject to the lenders consent. Alternatively, if you are able to apply for your own new mortgage, you could remortgage the property and transfer the title into your sole name. There may however be stamp duty land tax implications for this.

 

4.     No More Individual 1st Time Buyer Benefits

Joining forces with others to purchase your first property means you will lose the benefits that come along with being a first time buyer if you want to get on the ladder by yourself or with a partner at a future date.

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5.     2nd Home Stamp Duty Surcharge

It is important to note that you will incur a 2nd home stamp duty charge if you were to purchase another property. (From April 1 2016, anyone purchasing an additional property has had to pay an extra 3% stamp duty – this charge applies to buy-to-lets, second homes and even a property you buy with your children.)

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6.     Impact on Applying For Future Mortgages

In addition, you being a homeowner will be taken into consideration when you are applying for any future mortgages. Lenders will want to ensure that you can keep up the payments of your first property in addition to the payments for the proposed 2nd property.

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One option is that you switch the first property to a buy to let mortgage in order for you to be able to take out another residential mortgage. Another option could be that you sell your stake in the property or the property as a whole.

*This article is for general awareness only and does not constitute legal or professional advice.

Glossary

Declaration of Trust

A declaration of trust is a legally binding document that confirms the proportions in which two or more individuals own a property and how the property will be divided in the event of a separation, sale or death.

Equity

Equity is the share of the value of your property that you actually own, as opposed to that which you borrow as part of a mortgage

Help to Buy

A scheme introduced by the UK government designed to help people get on the property ladder or buy a new home without a large deposit. 

Joint Mortgage

When you buy a property with one or more other people by getting a mortgage in the names of both or all of you.

Joint Ownership

Ownership of a property or business that is shared by two or more people or organizations.

Joint Tenants

A type of property right where two or more people own a property together, each with equal rights and obligations, until one owner dies. 

Remortgage

Remortgaging is the act of switching your existing mortgage to a new deal, either with your existing lender or a different provider. You’re not moving house and the new mortgage is still secured against the same property.

Tenants in common

Tenancy in common allows two or more people ownership interests in a property. Each owner has the right to leave his share of the property to any beneficiary upon the owner's death in accordance with their Will.

Title

A title is a person’s right of ownership of property.