27 Feb 2017
Author: Stephen Breen
When you and your partner decide to buy your first property together, the last thing on your mind will be a break up. But to think this will never happen to anyone in your situation would be naïve.
Purchasing a house together – whether as partners, friends or siblings – makes perfect financial sense as you can pool resources – but failing to formalise what will happen if things go wrong can be a costly mistake.
The Council of Mortgage lenders has revealed that more than half of all mortgages taken out in 2016 were in joint names. With this type of mortgage, liability is ‘joint and several’, so each party is 100% responsible for the mortgage payment and can be pursued for the full sum if the other fails to come their share. This is regardless of the fact that the property might be held in 50/50 shares.
If couples split, or friends/siblings decide they don’t want to be part of the arrangement any more, the liability does not simply end. The lender may not agree to transfer the mortgage to the remaining party, and in those circumstances you will both still be responsible for the payments, whether or not you are living in the property.
Most legal advisors will suggest an unmarried couple or friends/siblings hold the property as ‘Tenants in common’. This means each has an identifiable share – perhaps 50%. However, note that a further issue arises if one party dies – their share will pass according to their Will (or according to the laws of ‘intestacy’ if they have not made a Will). Their beneficiaries may want to sell the property to release any equity that they are entitled to. The surviving party might not have the funds to buy the deceased party’s share.
The alternative way to hold a property is as ‘Joint tenants’. Both parties then own a 100% indivisible share of the property. If one dies, the other continues to own 100%. The downside of this is that they cannot pass on the share to who they choose in their Will. There are also implications later in life – if they die and their partner then requires care in later life, the Local Authority will take the full value of the property into consideration when performing a ‘means test’.
The solution for many unmarried couples, friends or siblings is to have a legal cohabitation agreement which sets out what will happen if the relationship does break down or one party wants to leave the house. A declaration of trust setting out exactly what each party is entitled to is also recommended. This is particularly important if the parties’ contributions to the deposit, mortgage and outgoings are not even.
While nobody wants to think that their relationship could end, relying on promises made to each other can lead to a lot of unnecessary heartache, stress and expense down the line. Having a legal agreement in place gives both parties reassurance and peace of mind.