Weston Homes Financial Expert Felicity Barnett offers essential advice for all those thinking of sharing a mortgage with a friend or family member.
‘Weston Homes new home buyer Katy and her brother, Andrea, bought together a three bedroom apartment at Abbey Quay. She said. ‘We have rented together for 5 years so we know we get on. If you have total trust in your sharing partner then buying together is a chance to own a new home. With a bigger deposit we were able to buy bigger and share a mortgage without being weighed down by the monthly payments. We share every bill and all household expenses are listed. We have set aside a furniture fund for everything we will now need to buy.’
If you cannot afford to buy a home on your own, sharing a mortgage with a friend or family member gives you a chance to get on the ladder, and build up some equity over time.
However, there are several factors both financial and legal to consider to protect all parties.
Honesty is the best policy
Be up front about your finances from the start to make sure your mortgage application runs smoothly. Each borrower will be assessed individually and once you own the property you will be linked financially. Be prepared to discuss your level of debt and your credit history, which will affect what you can borrow, and how much deposit each of you will be able to give towards the purchase. You will be assessed for the mortgage based on your incomes. Associated buying costs such as legal fees and stamp duty as well as a fund for furnishings and ongoing bills will need to be calculated. If you are buying with a parent who already owns a property, check for any higher stamp duty implications.
Your legal options and decisions
When property is owned by two or more people, for their own benefit, it is expressed to be owned by them either as joint tenants or tenants in common. These are legal terms:
For practical purposes, this applies if it is intended that you will each hold one equal share in the property. Under a joint tenancy upon the death of one of the co-owners, the deceased’s share will automatically and immediately pass to the surviving co-owner, irrespective of any direction in their Will or under the terms of the deceased’s intestacy. If you wish your co-owner to receive the whole of the property upon your death a joint tenancy should be utilised.
Tenants in Common
Upon the death of one of the co-owners ,the deceased’s shares do not pass to the other surviving co-owner, but remain part of the deceased’s Estate and can pass as directed under any Will made by the deceased person, or to his or her next of kin as appropriate under an intestacy. Also, under a tenancy in common, the property can be held by you in unequal shares and reflect the percentages to which you will each be entitled from any future sale of the property.
This form of tenancy is especially appropriate where co-purchasers are contributing unequally to the purchase price of the property. If a tenancy in common is to be used, the owners must consider making a Will. Please also note that if co-owners subsequently marry then their shares in the property may subsequently be varied by a divorce court in the event.
If you decide it’s best to purchase as Tenants in Common, give some consideration as to whether you require a Declaration of Trust, also known as a Trust Deed. The Declaration or Trust Deed can stipulate either a percentage or an exact amount put into the transaction. For example, the Deed could state that 70% was paid by one party. The declaration will go on to state that if the property is sold or transferred to an alternate owner the percentage or specific amount should be repaid. It effectively protects the investment. The document itself can be backed up by a restriction placed on the title which will state the existence of the document.
A co-habitation agreement to ensure you understand your responsibilities
Once you have a mortgage, you will all be responsible for paying it so if one person can’t pay their share, the rest will have to cover it. Drawing up a co-habitation agreement will make sure you all understand who is responsible for what, how much of the property you each own and how any disputes will be settled, or if one of the parties wants to leave or sell their share, whether you will rent the room to cover the mortgage, or remortgage to buy their share. Each person buying the property should have life insurance to cover their portion of the mortgage and a will in place which says who will benefit from your share should you die.
Bills, bills, bills
Set up a joint account to pay bills and make sure everyone has access to it, and that someone is appointed to pay the bills. Everyone should set up a standing order to pay a set amount in each month. This can also be used to pay any service charges, ground rent and buildings and contents insurance. Personal bank accounts should be kept separate. Make an inventory of possessions shared. In the event of a dispute it will be clear what is individually owned and what is shared.