As first time buyers struggle to afford to take the first step onto the property ladder joint ownership mortgages are flourishing. Friends can choose to buy a property together and thus raise the necessary deposit and split both the mortgage costs and living expenses. It’s a viable way to make a first house purchase as it often works out far less than renting, plus allows for investment. Up to four friends can buy together, or the joint ownership can be split between siblings, or parent and grown child. Some are even investing with strangers in the same position.
Joint ownership mortgages are sometimes referred to as shared mortgages, but are distinct from the shared mortgages which apply when a buyer purchases with a housing association as the landlord. However the potential for problems can arise with joint ownership so it is vital to have a legal agreement in place to stipulate certain rights.
A joint mortgage is required and all parties are jointly and severally liable for the mortgage, meaning if one person does not pay the other party or parties are responsible. Legal agreements are essential to cover the rights of each party. Some conditions are set in the mortgage agreement but an additional legal agreement is vital.
There are a myriad of considerations which could be written into the agreement yet not required by the mortgage lender. Buyers need to consider what would happen if one party wished to move a partner in who was not named on the mortgage; what they would do in the event of falling out; how each would feel about the other person renting their share to a third party; and including such issues as maintenance and cleaning of the property.
Legally the agreement must divide the property into shares equitable with each person’s contribution to the deposit and mortgage. It does not need to be an equal division between two parties. Agreement has to be reached that if one party wishes to sell they must offer their share to the remaining owner at the current valuation price. If the other owner does not want to, or cannot assume the rest of the mortgage then the property share must be offered on the open market. However if no sale is reached then the property must be sold and any equity split.
One party may just choose to move out and rent their share of the property to a third party, so it would be wise to add in an agreement that the renter has to be approved by the remaining party. In some instances buyers choose to rent their share from the beginning just for the investment aspect, yet live elsewhere themselves.
The most important consideration is that if one party either wilfully defaults on their payments, or cannot afford the payments, all parties are equally liable. Thus it is important to have payment protection insurance in place. A defaulting party can be forced to sell their share of the property but in the meantime if the whole of the mortgage payments are not met in full the other owner will suffer with a falling credit score and may face the property being repossessed. Thus it is always better to ensure one buys with a responsible person who understands the full implications of being jointly and severally liable for the mortgage.
Joint ownership mortgages are rarely entered into with the aim of two or more friends living together for life. It is expected that at some point one will move on, but the saving on rental payments together with any increase in equity can then allow the person to often buy their next property alone.