29 Aug 2017
Author: Stephen Breen
With house prices soaring, it can be tempting to pool your savings with someone you know to get your foot on the housing ladder. Whether this is your partner, sibling, friend or spouse, we look at the implications of joint home ownership.
Benefits of buying together
The main benefits of buying together are that you can put your money together to make a larger deposit, thereby giving you access to better mortgage rates – and you can typically borrow more with your combined earnings.
With a joint application you can also split the expenses involved in acquiring the property which include stamp duty, land registry fees and legal fees.
Pitfalls of joint ownership
Joint ownership can also bring with it a number of problems. If one of the owners wants their money back, the question arises as to what happens to the property – particularly if the other owners(s) cannot afford to buy them out.
Additionally, if one party decides to exit, you may not be able to afford the mortgage payments. If they also want their name off the mortgage, you’ll have to apply again on your own and may not be accepted. Consequently the leaving party may find they are still jointly and severally liable for mortgage payments, despite the fact that they do not live in the property. The only solution is to sell and repay the mortgage, although negative equity (where the sale proceeds do not cover the sum outstanding) can bring further headaches.
A further problem occurs if one party defaults on their share of the payments. Your credit rating and credit history will be affected unless the remaining parties cover the shortfall.
Even if the other parties uphold their share of the payments, your credit score can be adversely affected by theirs. The reason for this is that you are creating a financial association with each of the other buyers, so if they have difficulty managing their other finances, it may affect your own ability to apply for credit. It’s therefore a good idea to ask the other parties to disclose their credit scores and history at the start of the process so you can decide if you want to be linked to each person. If at a later stage you are removed from the mortgage (either because you leave the arrangement or it is redeemed) you should contact the three major credit reference agencies and ask for a disassociation, so they can see that there is no current link to the other borrowers.
Whilst most joint mortgages are taken out by two people who are a couple, some lenders allow up to four applicants. Those permitting up to four to buy will often only consider the top two incomes when deciding how much to lend. Metro Bank is one of the exceptions – it will assess the income of up to four applicants, and offer a 90% loan to value mortgage. Hinckley & Rugby Building Society also offer a five-year fixed deal at 90% LTV and will take up to four incomes into account.
Lenders are rarely interested in whether the applicants are partners, friends or family members.
There are two options for ownership: joint tenants or tenants in common. If you are buying with your partner, you might want to consider joint tenants which means that if you die, your share automatically passes to your partner and vice versa. However this arrangement is not right for everyone and many couples these days will choose the second option – tenants in common – instead.
Tenants in common means you have a divisible share of the property that you can leave to whoever you like in your Will. This arrangement is usually the right choice for family or friends. It can also be helpful for couples who are planning what will happen to their estate when they die – for example, you could give your partner a life interest in your share of the property with the remainder to your children. That way, if your partner remarries or gets into financial difficulty after your death, your share of the family home is safe.
If one of the buyers has contributed more to the property than the other, a cohabitation agreement or declaration of trust is necessary to set out the respective shares. This will record who has contributed what so that there is no dispute in the future. It can also set out how any increase (or decrease) in value will be handled and how expenses will be managed – for example, if one person contributes 60% of the deposit and 60% of the mortgage payments, they would likely expect 60% of any increase in value – but would they also expect to pay for 60% of any repair costs?
Once everything has been agreed, it is a good idea to open a joint bank account to make payments out of. This can be used for the mortgage and any bills associated with the property.