Friends and Finances: Buying Property with Mates
03rd June 2019
If you’ve been trying to get a foot on the property ladder recently, you’ve probably noticed there are a couple of dodgy rungs down toward the bottom. Taking out a mortgage with a few mates can be a decent way of sharing the load and risk. After all, any ladder’s a lot more stable with someone holding it for you. Before we get started, why not check if you're due a tax refund to boost your deposit? Lots of customers have told us that getting that cash back from HMRC sped up their saving.
The benefits of owning a property with your mates can sound like there's no downside. Sharing the load of mortgage repayments, Council Tax and household bills can be a massive weight off your financial shoulders. Dividing up the deposit on a place alone can open up properties or locations that’d be well out of your reach otherwise. You’re still making a long-term decision, though, so it’s critical to think ahead and not bite off more than you can chew.
You’ve got to know you can trust the people you’re relying on, of course – and there are a few hidden risks in co-buying to watch out for. With the right people and a few precautions, though, the sky’s the limit. Here are some pointers on keeping yourself (and your mates) from coming back down to earth with a nasty bump.
What are the different sorts of property agreements?
Not all co-ownership agreements are equal. You can own your property in a couple of ways.
If you agree to be “tenants in common”, you can pass your share of the property to someone else in a will. Up to 4 people can co-own a place this way.
“Joint tenants”, on the other hand, all have equal rights over the property, and your share automatically goes to them if you die. As far as the law’s concerned, you’re all one big tenant rather than a bunch of little ones. That means you can’t do things like mortgage just your share.
You should take specialist advice on which set up is most appropriate for your needs. When you speak to an advisor, everyone involved needs to be honest about their situation. If you give them incorrect information then that is what they will base their advice on and you might find yourself in difficulties if you painted your situation other than what it is.
Do you need a specialist mortgage for co-ownership?
There are actually some specialised types of mortgage designed for co-ownership, so a bit of hunting around could get you all a better overall deal. Typically joint mortgages come with the same costs as standard mortgages, including interest and mortgage fees. However, pooling your case for a higher deposit may give you a better choice of mortgage options, as well as simply the opportunity to look at bigger properties than you could afford alone, so you could choose one with a lower interest rate for example.
In most cases joint mortgages are taken out by two people (often a couple), but some lenders will allow up to four people to buy together. Lenders used to multiply the income of the borrowers by a set amount to decide how much they would lend you.
Now lenders base offers on a more advanced calculation that takes into account incomes, credit records and what you spend each month on bills and other expenses. What this means is that "more salaries" doesn't necessarily mean "bigger mortage offer" if some of those people have poor credit ratings.
What else should I think about?
People’s circumstances change all the time. Your mortgage provider probably won’t care where the money comes from, so if one of you can’t cough up their share it’ll be up to everyone else to cover the shortfall or you'll all be trouble. Make sure you've agreed what will happen in the case of circumstances such as one of you losing your job, or getting ill.
If one of you wants to sell up, you need to decide what happens to the place. Depending on the kind of agreement you’ve made, you may not be able to ditch your share of the place without everyone’s consent. This is one of the reasons why it’s important to lay out in advance what everyone can do with their chunk of the property. You need procedures in place in case you fall out, and you’ve got to make decisions about whether you can do things like rent out your room or move someone else in.
You’ll need to keep records of your costs for anything to do with the property, along with who’s been paying them. Losing a mate over money is always painful, but when you co-own a property you could be losing a whole lot more.
What kind of contract should I get?
There’s a legal document called a “declaration of trust” you can have drawn up, which can be helpful here. It sounds a bit scary, but it basically just outlines who owns what and who’s responsible for paying for everything. It can also put in writing what happens if one of you wants to sell up, move a partner in or whatever. It’s just about letting everyone know where they stand so you can avoid arguments later.
It’s definitely worth getting good, independent advice before diving into a co-ownership arrangement. Just as important, though, is knowing who your friends are.
Use your tax refund to help with your deposit
Remember, if you’re buying a home, a solid tax refund could mean a serious boost to your bank balance just when you need it most. Saving for a deposit or doing up a house is one of the most common things our customers tell us they've put their tax refunds towards.
With Refer A Friend, you’ll be putting your housemates in line for a chunk of change back from the taxman – and pocketing a little extra for yourself at the same time. It’s basically win/win all round – and the more you do it the better it gets for everyone! Read up on the scheme here – and check back soon for more Friends and Finances