The more we read about first-time buyers (FTB) the more we convince ourselves that there is a solution to the dilemma facing those aiming to step onto the property ladder for the first time.
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For every story offering a new product or option to help FTBs, there is another survey or statistic showing just how much of a challenge it actually is. So realistically, what are the best solutions? Along with the 100 per cent options, lower rates, and shared ownership sits one option that’s often unconsidered – the ‘mates mortgage’.
Literally speaking, this is a mortgage that is shared among various people who choose to live together in the same house. As this enables the deposit to be broken into several portions, it lightens the need for an individual borrower to raise the money and eventually means that a smaller mortgage can be taken out.
So, for example, if four people buy a £200,000 house, and can all contribute £10,000 to the deposit, the £160,000 mortgage will mean monthly repayments of £946 on a 25-year loan at a standard five per cent, or interest only at £666. Now obviously there is much more to the mortgage process than the above finances, but the ease of shared repayments shows just how more feasible the ‘mates mortgage’ is for the FTB.
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Pointing out the dangers
However Moneynet.co.uk has pointed out the dangers and flaws in the ‘mates mortgage’, with a report that advised applicants to be prepared when taking the mortgage out as an adverse credit history on one individual can damage the other applicant’s history too.
Moneynet.co.uk chief executive, Richard Brown, said: “As soon as you buy with someone else, your credit files will become linked to each other by what’s known as financial association. So, if one party has a poor credit history then all other linked parties could have their credit history adversely affected by association. It’s sensible therefore to provide one another with a copy of their credit file so that each can check the credit worthiness of the others.The worst case scenario is that if the mortgage goes into arrears as a result of one party missing their payments, then all parties to the mortgage agreement could find their credit file marked and their credit history adversely affected.”
A common arrangement?
So how common is the mates mortgage? Do lenders offer these as part of their standard package, and is it more common among the high street lenders than at the intermediary level?
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According to the British Bankers Association (BBA) and the Building Societies Association (BSA), around 60 banks and building societies are now prepared to lend to up to four applicants for a single property. So it was important to gauge the opinion of mortgage lenders to see what their attitude is to, and whether they offer, mates mortgages.
Kensington Mortgages does not offer ‘mates mortgages’. However, PR manager, Alex Hammond, believed that the multiple applicant mortgage was a way for brokers to increase their client base for the future.
He said: “If brokers want to increase the amount of clients they have and grow their business, then by dealing with more than two buyers you automatically have more clients for the future and when they sell up and move on they should return.”
However Hammond believed that many lenders who supply via intermediaries will not see much business from this market, as the majority of buyers will head to the high street as a first option – though he expected it to be on the radar for future expansion for lenders.
When things go wrong
So with the potential pitfalls considered for ‘mates mortgages’, what are the options for getting out of the mortgage for applicants when it all goes wrong? If it really is past the stage of reconciliation, selling the property and taking the money is the most obvious and final option. If all of the parties are agreeable to this and you can come to an acceptable sale price then, if you’ve drawn up agreements at the outset regarding equity shares, this should be straightforward and painless.
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Alternatively if one person is determined to stay in the property, another option is to buy out one or more of the parties. This will involve getting the property valued, agreeing on a value and raising the money to pay off the leaver. Also, the mortgage lender will need to agree to the release of the leaving party from the mortgage – this is likely to happen if the remaining parties convince them of being able to afford the mortgage without the leavers’ income. In the case of borrowing money to buy out the leavers’ share, the lender will need to be convinced that the larger mortgage will be affordable. Although complex, the reality of any possible scenario needs to be addressed at the earliest stage.
From the broker point of view, they need to be clear and straight with the applicants from the first point of contact. While the application process, especially for FTBs, can be an adventure and rather exciting, brokers need to advise and instruct on the potential fallout on what happens if it doesn’t work out.
With borrowers clear on the details from the start, this will solve problems should they arise, and make life easier for everyone.
