Buying a home with others
As millions of people struggle to get onto the property ladder, many are turning to group mortgages as a way of buying their first home. In fact, getting a mortgage with friends or family members is becoming increasingly popular, particularly in areas with high house prices such as London.
Thanks to the credit crunch, first-time buyers now need a fairly hefty deposit in order to get accepted for a mortgage – the very best deals require a deposit of 40% of the property value. This has priced many first-time buyers out of the housing market. Group mortgages, however, can help to reduce the cost of a mortgage because you split the cost of the deposit between several of you. Up to a maximum of four people can get together and buy a property, but be warned that if one person fails to meet their share of the mortgage repayments, every co-owner's credit score can be affected.
Why choose a group mortgage?
If you are a first-time buyer going it alone, you may struggle to stump up enough of a deposit to qualify for a mortgage. Therefore, taking out a group mortgage with a friend or group of friends could be the perfect remedy to this problem. The average age of a first-time buyer in the UK is now over 32 years old, so it's obvious why more and more young people see group mortgages as a good option.
Many first-time buyers want to get onto the property ladder because renting is expensive and you're effectively throwing money down the drain – or into your landlord's pocket anyway. Investing in a property with your friends or family members ensures you are actually paying for the bricks and mortar making up your home and means you don't have to rent a room with random people. You also won't have to worry about your landlord kicking you out at short notice and don't forget about the investment value of properties in major cities.
In many cases, the cost of monthly rent is actually more expensive than paying a mortgage and this is where many renters get stuck in a vicious circle as they cannot afford to save up for a deposit on a house or flat.
Having a group mortgage could therefore save you money each month as well as make the deposit on the property more manageable. By combining four incomes, potential homebuyers can improve their buying power because they can hand over a greater deposit and will be offered more competitive mortgages. If you get a lower interest rate on your mortgage, this will bring down your monthly payments. But each buyer needs to decide what contribution they are putting towards the deposit and the mortgage repayments.
Group mortgage risks
As you are signing a legally binding document with friends or family, be aware that you will be financially linked with them for the duration of the mortgage. This will be noted on your credit rating. Banks and building societies check your credit score every time you apply for credit, such as a credit card, personal loan or even a mobile phone contract. If your credit rating isn't up to scratch, you will be rejected.
Due to this financial linking it's very important that the people you are choosing to share a mortgage with are not just good friends, but they are financially reliable and have good job security. If they're not and they can't keep up with their part of the mortgage repayments, you and the rest of the people named on the mortgage will be chased for the payments. If you can't meet them, or even if the payments are late, this will negatively impact your credit rating. Ultimately, if you're continually missing payments, it could lead to you losing your home.
How do I get a group mortgage?
The process is very similar to taking out a regular mortgage except all potential homebuyers have to agree terms and conditions of the ownership; this is known as a trust deed document. This process is essential because if a co-owner's circumstances change, so does the makeup of the whole mortgage structure.
What happens if one person wants to move out or loses their job?
This is one of the major pitfalls of group home ownership and it's why a legal agreement should be drawn up before the purchase of the house is completed and the mortgage is approved to detail all potential problems, such as one person wanting to move out, etc.
For example, the person moving out might have to pay an early redemption fee on their part of the mortgage if they are getting out of it early. Or they might decide to retain their share in the property and will rent out their room. Bear in mind that if someone does move out and relinquish their share of the property, if you and your remaining friends can't afford to buy this share or you can't find someone else to move in, you'll have to sell up. In preparation for this, your agreement needs to show exactly how much each of you will receive from the sale of the property.
Similarly, the agreement could state that if someone loses their job, the remaining members will club together to cover their mortgage repayments for three months, while the unemployed member finds a new job.
1. Rent a place with your friends first to check you're happy living together
2. When you buy a place together, keep a record of who has contributed what towards the cost of the house
3. Set up a joint bank account so that mortgage payments can be taken from it and keep a record of the payments
4. Work out who will receive what if you have to sell the property
5. Work out what will happen if one person wants to move out early
6. Keep an inventory of shared and individually owned items in the home
7. Set some house rules
8. Be honest with each other to prevent disputes.
Another option as a first-time buyer is a guarantor mortgage. This type of mortgage requires someone else to guarantee that if the homeowner can't make the repayments, they will. This is generally a product considered by those who can't afford to place a large deposit on a property.
Although the guarantor doesn't strictly have to be a relative, many people look to parents for this type of mortgage. The person helping out will have to show the mortgage provider that they are close to repaying their mortgage or have fully paid off the loan.
A guarantor mortgage helps if, for example, the young person has insufficient income using a lender's multiples and needs a guarantor to make up the shortfall. A guarantor could be needed even if the young person can actually afford all the monthly payments himself.
However, being a guarantor is not a commitment to take on without careful consideration. If you agree be a guarantor, you need to be aware that if at any point the monthly repayments are not met you will be called upon to foot the bill. And it's difficult to stop being a guarantor unless you can get someone else to take it on (and if the lender is agreeable to the substitution).
As with all mortgages post-credit crunch, guarantor mortgages are harder to get and the conditions particularly onerous. That said, many of the 100% mortgages that are reappearing on the market require relatives to provide a guarantee secured against their own property for a set amount.
Pros and Cons of guarantor mortgages
- Your guarantor can help you get a mortgage without spending any of their money.
- You can finally get onto the property ladder.
- You can take full control of your mortgage at any time.
- The guarantor is at huge financial risk if you don't make your mortgage repayments.
- Guarantors are put through the same financial assessments as the person taking out the mortgage.
- Interest rates offered on these mortgages are higher than on standard mortgages.
- Choose the people you share with carefully
- Agree who is paying what
- Work out what happens if you need to sell up
Before signing up to anything, rent a place with your friends first to check you can live together