With the soaring rate of house prices in the UK, getting on the property ladder is an increasingly difficult task for first time buyers and consequently more people are now considering buying a house with a friend or member of their family.
By sharing the deposit and mortgage repayments single people who do not have a large enough deposit or income to secure a mortgage are able to own part of a property and raise capital for future investments.
Purchasing a house with a friend or family member does come with risks and both parties should consider the benefits and drawbacks carefully before entering into joint ownership, but providing each party follows the recommended procedures and seeks legal advice the risks can be kept to a minimum and co-buying can be very profitable.
There are many significant benefits that come with buying a property with a friend or member of the family but most people chose to do it because it allows them to move up the property ladder much sooner and more easily than they would otherwise be able to. Other benefits of joint ownership may include:
- Shared deposit – joining with another party means the deposit is split so joint owners don’t have to spend as long saving up for enough capital.
- Shared initial costs – purchasing a property can incur hefty legal costs and solicitor fees but joint ownership means short term and long-term costs are all shared.
- Larger mortgage – having a co-buyer may mean that the purchasers can consider a bigger house or more favoured area than they would otherwise be able to.
- Shared mortgage repayments – sharing mortgage costs means that the mortgage term can sometimes be shortened and interest costs are then reduced.
- Shared maintenance costs – it is not just mortgage and purchasing costs that are shared when buying a house with a friend or family member. All bills and decorating/maintenance costs can be shared between each party.
- Formal deed and agreement - The formal deed and agreement that joint owners are encouraged to draw up means disputes are more easily solved than if buying a property with a spouse or partner.
There are also specific drawbacks to consider when buying with a friend or family member that are less likely to occur if buying with a spouse of partner. These include:
- Added legal costs – the formal deed and agreement required by co-buyers means that more solicitor fees will be incurred.
- Disagreements – there is the possibility of any number of disagreements when sharing ownership, most commonly that one party may want to sell their share of the house before the other party is ready to move on.
- Financial complications - Working out finances can get complicated, especially if one party pays more of the deposit than other.
There are various procedures house buyers must go through when investing in a property with a friend or member of a family. It is important to seek the advice of legal and financial professionals in order to ensure the process incurs as few risks as possible.
Borrowing a mortgage
As with a single owner’s mortgage, the amount of money that can be borrowed by joint owners depends upon the combined income of the two parties. Today, more and more banks offer various mortgages aimed at friends and family members buying together and independent mortgage advisors are also informed about the pros and cons of the different mortgages available.
Deciding type of ownership
There are two types of joint ownership to consider when looking to buy a house with a friend or family member, and co-buyers must select one type in the early stages of proceedings:
A joint tenant agreement means that each party has equal ownership of the property rather than a specific share. If one owner were to die the whole property would legally belong to the other owner regardless of the specification in the will. This is most often chosen by owners who don’t foresee living separately in the future and would want their property to be passed to the other owner were they to die.
Tenants in Common
This means that owners specify how much of the property each party owns. If one party were to die their share of the house would go to whoever was specified in their will rather than automatically being passed on to the other owner. Having ownership of a specific share of the property also means that it is easier to work out how much of the equity should go to each party when selling the house. For these reasons, Tenants in Common is the type of joint ownership usually selected by owners who are friends, family relations or business partners.
Drawing up a co-habitation agreement
No matter how close the friendship or family relationship may be, it is well worth drawing up an agreement as an insurance against possible disputes. A co-habitation agreement will guide the two parties on how to resolve any disputes that may have been unforeseen at the beginning of the purchase, but it is not intended to allow one party to gain an advantage over the other. To form an agreement, it is recommended that the two parties draw up a draft document together and then give it to a legal advisor who will put the document in to a more appropriate format. The legal advisor could also act as an arbiter should a dispute arise and the arbiter’s decision would then be binding.
There are various points to consider when drawing up a cohabitation agreement, and no matter how obvious it seems, it is wise to put every aspect of the ownership into writing. Legal advisors recommend that the agreement states:
- Deposit paid by each party
- Purchasing costs and solicitor’s fees paid by each party.
- How much of the mortgage repayment will be paid by each party.
- How and when mortgage repayments will be made.
- How cost of home and contents insurance will be shared.
- How the day-to-day running costs of the house will be shared.
- Furniture/shared items and costs as and when they are purchased.
- House rules including unacceptable/undesirable behaviour.
- Agreed policy for keeping up payments.
- Agreed policy for the event of one party going into deliberate default.
- Agreed policy for another mortgage payee joining the arrangement.
- Agreed policy for breeching any of the co-habitation clauses.
- Agreed policy were one party to die.
Drawing up a trust deed
A trust deed works in a similar way to the co-habitation agreement, allowing owners to avoid possible conflicts. The deed requires the owners to write down how much of the equity each party is entitled to on the sale of the house. There is no fixed way to work this out but may depend on contributions to the house deposit, bills or maintenance costs as well as mortgage payments.
There are a number of useful web-based resources to help you make informed decisions when buying a house with a friend or a member of the family:
SharingAccommodation is an easy to use site offering financial and legal guidance.
Go Direct has a lot of useful information for joint owners but particularly helpful is its mortgage repayment calculator which allows you to compare joint owner mortgage quotes from the comfort of your own home.