Getting a mortgage with friends

Property prices for even the smallest apartments are beyond the reach

of many first time buyers nowadays. As a result, more and more people

are clubbing together with friends to share a mortgage and ownership of

a property. It’s a very good way to get on the property ladder, but as

such arrangements are never normally for life and one or more party

will inevitably want to sell eventually, the fine details should be

agreed clearly at the outset to avoid financial loss or the loss of

friendships.

The terms of a joint ownership mortgage are no different from a standard mortgage.

Regardless of the amount of deposit that each person pays or the salary

that they are earning, each shares equal liability for making the

mortgage repayments as far as the mortgage lender is concerned. So if

one person stops making repayments, the others will have to cover their

share to ensure that the full repayment amounts are paid. It’s up to

the joint owners to decide how they will divide the mortgage repayments

and ownership of the property between themselves.

Clearly, a legal agreement is the best way to ensure that everyone

understands their rights and responsibilities. This isn’t a sign of

mistrust, it’s simply a guarantee of protection for everyone. Although

not compulsory when taking out a joint mortgage with friends, it’s

certainly wise to do so. It won’t cost much to have one drafted up by a

solicitor. In fact so many people are taking out mortgages in this way

that some mortgage lenders provide specially tailored joint ownership

mortgages that include the drafting of a legal agreement.

Although the mortgage calculation is based on the sum of everyone’s

incomes combined, the mortgage lender doesn’t give people different

sizes of share in the mortgage or property. How much each person

contributes towards the repayments is up to the joint owners to decide.

It doesn’t have to be directly related to each person’s salary. This

should be set out in the written agreement.

It can become more complicated in circumstances where individuals have

put down different deposit amounts. However, again it’s up to the joint

owners to decide how they want to divide the shares in ownership and in

the mortgage.

If there’s only a small difference in the amount of deposits paid by

everyone, it can be evened out informally by those who paid a smaller

deposit making separate repayments to those who paid a larger deposit

until their contributions are balanced out.

Alternatively, you may decide that each person has their deposit amount

returned to them upon the sale of the property before the remaining

profit is shared equally among the joint owners. This tends to work

best in circumstances where the deposit amounts are low.

A common agreement for joint owners who have paid different deposit

amounts, particularly if they are a large sum, is for the share in the

ownership of the property to be equal but for each person’s deposit

amount to be taken into account when calculating the mortgage repayments,

so that those who put down smaller deposits have a bigger share of the

mortgage. When it comes to one owner leaving or the property being

sold, each person’s share in the profit is determined by calculating

their share of the current balance of the mortgage deducted from the

current market value of their share. This is fairer than taking an

equal share of the gain plus giving each person back their deposit

amount, as those who have been paying more towards the mortgage as a

result of their lower deposits will actually have been paying more

towards the capital than those who paid lower monthly amounts because

of their higher deposit.

There are several different ways in which a person’s circumstances may

change, thereby affecting their share of the mortgage and property. The

details of what will happen in such situations should be ironed out in

the legal agreement.

If for any reason one of the joint owners wants to leave, there are

various possible options:

the person keeps their share of the mortgage and property and

rents out their room

the person sells their share to the remaining owners who can then

rent out the room if they wish

the share is sold to a third party in direct replacement of the

person leaving

the whole property is sold and all parties leave

Insurance should be taken out as part of the legal agreement to cover

situations in which people are unable to continue paying their share of

the mortgage for a period of time, for example because of illness, injury,

redundancy or death. For illness or injury, insurance cover will normally

make their repayments for them for up to a year, and if the person is still

unable to make repayments after this, their share of the property will almost

certainly have to be sold.

If one of the joint owners dies, life insurance will provide a lump sum

to pay off the person’s share of the mortgage, and, depending on the

legal agreement drawn up, their share of the property will become part

of their estate. Writing a will is a sensible precaution for ensuring

that the deceased’s estate is distributed according to their wishes.

There are other things you’ll need to agree such as whether third

parties can live at the property, and if so, for how long. You’ll also

need to decide how you’ll split the fees for buying and selling the

property.

All of these issues should ideally be specified in the agreement, which

is best drafted by a solicitor to ensure that it’s fair and legally

binding and covers all eventualities. Joint ownership with friends

should be an enjoyable experience and you wouldn’t want to lose out on

friendships or money as a result of misunderstandings.

Biography:

Author: Benedict Rohan

Website: http://www.mortgagenation.co.uk

Benedict Rohan works as a freelance finance writer. Commercial Mortgage, Homeowner Loans, RemortgagesThis article is free for republishing
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