It seems a convenient solution for a generation desperate to buy property: team up with your mates in the style of films and sitcoms such as The Odd Couple or Two and a Half Men.
Where two or more friends can combine their incomes and deposits, they’re able to meet high prices and satisfy mortgage lenders’ demands for a down payment.
But the process involves risk, not only of falling out with friends or moving on at different times, and needing to get back the capital, but also the financial risk of falling property prices or inability to meet mortgage payments.
“If the remaining person or people can’t afford the mortgage, then the only way would be to sell” Shaun Church, Private Finance
The average first-time buyer spends a record £161,912 on a property, according to Moneyfacts, having to stump up a deposit worth an average 70pc of their annual wage.
Santander has predicted that property transactions between friends or family members will increase by 25pc a year – something that mortgage brokers say is already happening.
Oliver Michlethwaite-Howe and Chris Bolton typify the new breed of home-sharers. Buying together was their only way of getting a foot on the London property ladder. The pair, both 29, bought a two-bedroom ex-local authority flat in Bermondsey, south London, last year.
Mr Bolton, who works for a spirits merchant, said: “We’re old school friends and we were having a pint in the pub. Oliver said he was struggling to find somewhere to buy, and I was in the same position.
“I’d been playing with the idea of buying a flat for a while, but getting the mortgage and the deposit lined up by myself wasn’t going to happen.”
Together the pair had a big enough deposit to secure a mortgage for 85pc of the £365,000 property with both contributing equally. They also split the monthly mortgage payments and when the property is sold will each receive half of the proceeds.
They have no formal contract with each other.
Getting a mortgage
Lenders don’t normally differentiate between two friends or two people in a couple, which is why there is little data available on “sharer-buyers”.
Many lenders will take into account only two people’s income, although Shaun Church, of the mortgage broker Private Finance, says that Metro Bank will take into account up to four incomes.
Other banks, such as Barclays, will allow the mortgage to be in up to four names but only take into account two incomes.
If the lender does take into account all your incomes, there is no reason why you should not be able to access the same mainstream mortgage deals as any other first-time borrower.
Think carefully, however, about the mortgage term you choose. A five or 10-year fix won’t be suitable for someone living with a friend in their mid-twenties.
Mr Bolton and Mr Michlethwaite-Howe went for a three-year fix starting at 1.9pc with TSB and will use the end of that period to review the situation.
Avoiding future difficulties
Problems might arise when one buyer is looking for somewhere in the short term, while another plans to stay put for longer.
Many people in their twenties might be single when moving in together, only to find that within a couple of years one of them is ready to start a family. It helps to be honest with the person you are buying with about your plans for the future.
Mr Bolton and Mr Michlethwaite-Howe are both in relationships and have taken this into account when planning their next move.
However, should one of you wish to move on, difficulties can arise when one buyer is providing a larger deposit amount and needs the equity back to move house.
This can be resolved if the lender is happy to remortgage the property on the basis of the remaining buyer’s income alone. But if that person doesn’t pass affordability tests, they might have no choice but to sell.
“You would need to refinance your mortgage to pay off the person who is leaving and remove them from the deeds,” says Mr Church.
“But if the remaining person or people can’t afford the mortgage, then the only way would be to sell. Otherwise you could end up with your money trapped in the property.”
This might be easier to manage if you are buying with a family member, when you could perhaps rely on financial help from the wider family.
Cover the legal angles
A declaration of trust should be drawn up when the house is bought, with conditions about who owns what percentage of the property and what happens should the house be sold. This is important when you have more than two buyers and unequal contributions to mortgage payments and deposits.
For example, when one person provided a larger deposit but pays a smaller share of the mortgage, an arrangement could be made where that buyer receives their deposit back plus a smaller share of the equity growth when the house is sold.
It could also include a commitment to review the situation after a certain period, providing opportunities to leave if individual owners want to move on.
Buyers will also want to consider whether to buy the house on a tenancy in common or joint tenancy basis.
When there are unequal amounts of equity involved, a tenancy in common is popular. This is because with a joint tenancy, if one partner dies, the other one automatically inherits the property. However, with a tenancy in common, each person can choose to leave their share to someone else.
Another option is to buy the property in your name and let a room out, perhaps to a friend looking for somewhere to live.
“Rent a Room mortgages” allow borrowers to use projected income from a tenant to pay off a mortgage. You will still need to find the full deposit on your own, however.
The rates tend to be higher than average. Bath Building Society, for example, has one at 2.99pc, fixed for five years.
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