In today’s overcrowded housing market, it can make perfect sense to club together with friends, pooling savings to make up a more substantial deposit and to make a joint leap on the property ladder. But there are a number of key legal and financial arrangements that must be made before making the leap.
Ben Thompson, director at Clear Cut Mortgages ( www.clearcutmortgages.com) advises:
“Living with a good friend can be the time of your life. Two people joining together when purchasing their first home makes the step onto the housing ladder a lot more affordable, as well as making the whole process less daunting.
“However, getting a joint mortgage is a very important investment and you need to ensure you make the right choice. Get as much advice as possible before taking the plunge.”
Independent, no-fees adviser Clear Cut Mortgages warns of the pitfalls for pals thinking of getting a joint mortgage.
Five moves to mortgage bliss
1. Choose your friends carefully
It’s not only financial and legal preparation that you need to consider, but you also need to prepare yourselves emotionally. If possible, take a leaf out of Chandler and Joey’s book and rent together before buying to ensure you can live with each other in the long-term.
2. Mixing money with friends
In most cases, friends will be coming together with very different financial backgrounds. Decide whether to approach a lender who can base lending on income multiples or on affordability. A number of lenders will allow up to four names on the application form, however some will only take the highest two salaries when considering income multiples.
Make sure you get good advice on which type of loan will suit you and your friends best – and of course ensure you can all keep up repayments.
3. Jumping (friend)ship
Buying with friends is often seen as an affordable stop gap before buying with a life partner. So, it’s highly likely that one of the friends may want to sell or move before the other one. Most often, this will force the person staying to either buy out the mortgage entirely, find another friend to take their place, or sell up completely and all start again from square one.
It may be best for the borrowers to pick a product with a short tie-in or with no tie-in at all. This allows for changes in people’s circumstances, enabling them to move on without being liable for redemption penalties. It’s also advisable to have a minimum notice period that should be given by either party in the event of them moving on.
4. What’s in a name?
Decide if your agreement will be a joint tenancy or a tenancy in common. Many friends will opt for a joint tenancy that means the property is owned equally and will automatically pass to the other person if one person dies. If you’d rather your share of the property passes to another member of your family, you should opt for a tenancy in common. A tenancy in common will also allow you to take a larger share of the gains if you invest more in the mortgage than your friend.
5. Mates rates
Often, two friends will club together to buy a three-bedroom property so they can get extra income from a third person. However, major legal problems can occur if the third person moving in is not a legal owner of the property. Does the person moving in have the rights of a lodger, a tenant, or do they have other legal rights over the property? If friends contribute towards the owner’s mortgage payments or pay for repairs and improvements to the property, a trust could be created to avoid other legal problems.
If you’re first time buyers thinking about buying with friends, Clear Cut recommends:
For customers wishing to club together to borrow as much as possible: Abbey National 2 year tracker mortgage at 3.84%. Up to 4 friends are allowed on each application.
For customers wanting a 2 year deal with no extended ties: Lambeth Building Society 2 year discount mortgage at 3.49% (discount 2.45% off SVR).
For customers wanting a 2 year deal with no ties at all: West Bromwich Building Society 2 year discount mortgage at 3.99% (discount 1.75% off SVR).
Customers wishing to speak to a Clear Cut adviser should call: 08450 614 592 or they can visit www.clearcutmortgages.com.
