As house prices continue to rise, getting onto the property ladder has become increasingly difficult for many first-time buyers. So, it's perhaps no surprise that there has been an increase in the number of people joining forces with friends to cobuy a property.
Paul Stokes, head of products at M&S Bank, says:
"The option of becoming a mortgage-mate is particularly appealing to those already in a housemate arrangement, and our research shows that the concept has become increasingly popular with millennials."
There are lots of advantages to buying a property with a friend, but plenty of pitfalls too. Keep reading to find out more about the pros and cons.
The advantages of buying a property with a friend
A 2018 survey by M&S Bank found that six out of ten of people aged 18 to 35 said they would consider taking out a mortgage with friends or family members to get a foot on the property ladder, as would a quarter of those aged over 36.
Simon Nosworthy, Head of Residential Conveyancing at London law firm Osbornes Law believes there are real benefits to co-buying – where up to four friends or family invest in a property together.
Simon explains:
“The main benefit of co-buying is that if you have savings you can invest them in a property now rather than throwing money down the drain paying rent. So instead of buying an entire property you are buying the share of a property."
"This enables you to get on the property ladder a lot quicker than having to save while property prices go up as you only have to pay a fraction of the deposit. If you pool your resources, it could also allow you to buy in a better area than you would otherwise have been able to.”
Many mortgage lenders offer products where several people can all be named on the mortgage, with multiple incomes being taken into account. Up to four people can be jointly registered as co-owners of a property, and borrowers generally share the cost of the deposit and the legal fees and expenses incurred in buying the property. However, it's often worth speaking to an expert if you're thinking of buying with friends, as some lenders have a maximum of two applicants.
What to think about if you're thinking of buying a property with a friend
The main thing you need to draw up before buying a property with a friend or group of friends is a Trust Deed. This sets out:
• The amount of the deposit paid by each individual
• What percentage of the equity each party owns
• What proportion of the mortgage each party pays
• The procedures for leaving the co-ownership arrangement
• What happens if everyone decides to sell
• The financial split on completion of sale.
Simon comments: “The most crucial thing is that you get a Trust Deed prepared. If you don’t have this then it’s tantamount to financial suicide as this could lead to disputes and confusion about property ownership."
"You should also consider preparing a will setting out where your interest in the property will go in the event of your death. If you want to be really organised, you could go even further and get a cohabitation agreement and put in who pays for repairs and who pays for the utilities.”
Remember that you and all parties are equally liable for the payment of the mortgage
When you choose to take out a mortgage with friends, it’s worth remembering that you remain liable for all of the mortgage repayments and the total mortgage balance, not just your part of it. So, if one person doesn’t pay the mortgage, everyone else must pay it.
Simon comments:
“This is something to consider and you need to trust the other people you are buying with. What happens if one of your friends loses their job? You may be able to speak to the lender about deferring payment options such as extending the length of the mortgage, but it’s far from ideal and at the discretion of the mortgage company.”
What happens if one party wants to leave the arrangement and take their share?
One of the potential problems of buying with others is when one party wants to leave the property and collect their financial share.
Simon explains:
“If the property has gone up in value then there are a number of issues. If it has gone up 20% then the others have to pay 20% of what? Is it worth what the estate agent says? A property is only worth what somebody will pay for it. The parties will have to agree on a figure. “Then the remaining parties have to find the funds so that they can pay off the exiting party and they may need to remortgage in order to do this. If they can’t afford to buy them out, then they would have to sell the property.”
Why co-buying may not be a long-term arrangement
While co-buying is a great way to get onto the property ladder, for many it may not be a long-term option. In time, it’s likely that one party will want to settle down with somebody and get a place of their own.
Simon concludes:
“The thing that makes co-buying such an attractive option is that it offers people the chance to get on the property ladder and at earlier and for some when it may otherwise have been impossible.”