Property Buying Guide
Joint Mortgages and How the Finances Could Work when Co-buying.
More and more people are clubbing together to buy their own home. It enables them to get out of the rental trap and invest in their future. In many cases, sharing costs through joint ownership can work out cheaper than renting!
Having a joint mortgage means that you are both or all responsible for paying the mortgage payments. It does not matter from whom the payment is made, so long as the monthly repayments or interest are paid to the lender. When you come to terminate the mortgage, you will be able to look at your records to see the proportions in which the remaining equity should be split.
If any of the joint owners is unable to pay into the mortgage for any reason, the payments will still be required by the lender and alternative arrangements should be made to pay the mortgage or reduce the amounts that need to be paid.
As joint ownership is a developing trend, more and more mortgage lenders are offering mortgages designed specifically with joint owners in mind, and the choice of joint mortgages continues to increase. A typical example of what the mortgage lenders will lend is three times one person's salary plus one times each of up to three other joint owners, but a recent new mortgage claims to lend over three times combined salaries.
You will need to take mortgage advice to find out how much you can borrow and what the repayments will be
However, every pair or group's situation will be different – each person may pay a different amount towards the deposit, or make different payments into the mortgage each month. Perhaps some will have parental involvement in the arrangement. Also, there are many types of mortgages available and various insurance policies that need to be taken into consideration.
If you rent out a room in the property to a lodger, the first £4,250 you earn this way may be exempt from tax. Visit the Inland Revenue for full details. It can be factored in to your income when calculating how much you can borrow though – there are mortgages that specifically do this, featured in our best first time buyers mortgages table.
How the finances could work when you buy a place with friends.
In this simplified fictitious scenario, three friends: Tim, Andy and Mark, are keen to get onto the property ladder. They earn different amounts (Tim earns £35k pa, Andy £32k pa and Mark £42k pa.) and have access to different amounts to put into the deposit. Tim is dipping into savings, Andy is being helped out by his parents and Mark is taking out a loan*.
If they had all put the same deposit down, paid the same monthly mortgage payments and contributed equally to the upkeep of the building, the sums would be a lot simpler. We have chosen a more complicated model in order to demonstrate just one way that joint owners could decide to arrange their finances.
To keep things on an even keel and because they don't know how the final split will actually be made (one or all of them might want to alter the amount they put in each month) they have decided to split the costs of purchase (Stamp Duty Land Tax, search fees, conveyancing, trust deed and co-habitation agreement, survey etc) in equal proportions between the three of them.
Tim contributes £7,000 to the deposit and is willing to pay £425 per month into the mortgage.
Andy contributes £2,000 to the deposit and is able to pay £375 per month into the mortgage.
Mark puts a whopping £18,000 into the deposit and can pay £475 a month into the mortgage.
If they felt able, they could possibly pay more than the monthly requirements for the repayment mortgage and reduce the term of the mortgage. This would save them money (interest) in the long run.
They find a three-bedroom house in Southtown which they all like. It costs £220,000. They obtain a joint repayment mortgage for £193,000. They borrow this on the basis of 3 x £42,000 plus 1 x £35,000 and 1 x £32,000. They could have borrowed more, but decided that was the right amount for them. The mortgage interest rate is 5%.
Their total deposit is £27,000. In a less expensive area or town, a much smaller deposit and/or mortgage might be required, making everything even more affordable. Their combined monthly mortgage payment is £1,275 at the outset. Tim pays £425 per month, Andy pays £375 per month and Mark pays £475 per month.
If circumstances change and they want to pay the mortgage off sooner, they could increase their monthly mortgage payments and reduce the term (and therefore the overall interest paid). Alternatively, if they want to pay in less each month, they could increase the payment term.
Accurate records (backed up and copied!) should be made of exactly who pays what into the mortgage account. The three should also agree on how improvements and maintenance are paid for and compensated, before they buy together. This should be recorded in the co-habitation agreement. In this case, they decide to lump improvements and maintenance into the amount invested into the property.
After three years, Tim and Andy decide to move on and buy with their girlfriends and Mark now feels he can afford to buy a place of his own.
Before they bought together, they agreed how proceeds from the sale of the house or termination of the mortgage would be split.
In Scenario One, below, they decided the following: on the sale of the house, they would split the equity in proportion to how much each has paid towards it. The house had gone up £22,000 in value, they had paid off £11,000 of the mortgage and with the deposit of £27,000 there was £60,000 to divide between them before selling costs.
In Scenario Two below ,they decided to share the total equity in proportion to each partner's stake.
Because they all wanted to sell up at the same time, they decided to split the cost of selling the property in proportion to the percentages of total money invested. Alternatively they could have split the equity after the costs of selling were deducted. We have taken these costs out of the examples for simplicity.
Had one party brought about the sale of the property or redemption of the mortgage, they might have decided in their co-habitation agreement to allocate these selling costs and any redemption penalty another way.
How the finances worked out over the three years:
And they are all in a position to put down bigger deposits on their next home!
Alternatively, the three could have rented and paid £1,500pcm between them, ie £54,000 over those three years and not started paying any of the interest on a mortgage.
Seek independent financial advice to see how the finances would work for you and your friends. It should also be stated that you need to consider the possibility of negative equity - house prices are not guaranteed to rise.
* Beware of over-borrowing. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured against it.
Find out more about Joint Ownership, Joint Equity and Co-Buying a property in our guide:
What's good about joint ownership? What are the downsides of joint ownership? l How much can we borrow for a joint ownership mortgage? l The two types of joint ownership, joint tenancy and tenants in common l Drawing up a trust deed, or declaration of trust and joint ownership agreement l Example of a declaration of trust l Example of a joint ownership agreement l Finding someone to invest with and tips for those using joint ownership schemes where you can meet other prospective joint owners. l Frequently asked questions about joint ownership
Most useful and most popular pages on this site:
Look for your First Property l Seek First Time Buyer Mortgage Advice l See our Best First Mortgages Comparison Table l Find out about First Time Buyer Mortgages l Find out How to Buy a House l Learn all about The First Time Buyer Mortgage l Shared Ownership