Property prices for even the smallest apartments are beyond the reach of many first time buyers nowadays. As a result, more and more people are clubbing together with friends to share a mortgage and ownership of a property. It’s a very good way to get on the property ladder, but as such arrangements are never normally for life and one or more party will inevitably want to sell eventually, the fine details should be agreed clearly at the outset to avoid financial loss or the loss of friendships.
The terms of a joint ownership mortgage are no different from a standard mortgage. Regardless of the amount of deposit that each person pays or the salary that they are earning, each shares equal liability for making the mortgage repayments as far as the mortgage lender is concerned. So if one person stops making repayments, the others will have to cover their share to ensure that the full repayment amounts are paid. It’s up to the joint owners to decide how they will divide the mortgage repayments and ownership of the property between themselves.
Clearly, a legal agreement is the best way to ensure that everyone understands their rights and responsibilities. This isn’t a sign of mistrust, it’s simply a guarantee of protection for everyone. Although not compulsory when taking out a joint mortgage with friends, it’s certainly wise to do so. It won’t cost much to have one drafted up by a solicitor. In fact so many people are taking out mortgages in this way that some mortgage lenders provide specially tailored joint ownership mortgages that include the drafting of a legal agreement.
Although the mortgage calculation is based on the sum of everyone’s incomes combined, the mortgage lender doesn’t give people different sizes of share in the mortgage or property. How much each person contributes towards the repayments is up to the joint owners to decide. It doesn’t have to be directly related to each person’s salary. This should be set out in the written agreement.
It can become more complicated in circumstances where individuals have put down different deposit amounts. However, again it’s up to the joint owners to decide how they want to divide the shares in ownership and in the mortgage.
If there’s only a small difference in the amount of deposits paid by everyone, it can be evened out informally by those who paid a smaller deposit making separate repayments to those who paid a larger deposit until their contributions are balanced out.
Alternatively, you may decide that each person has their deposit amount returned to them upon the sale of the property before the remaining profit is shared equally among the joint owners. This tends to work best in circumstances where the deposit amounts are low.
A common agreement for joint owners who have paid different deposit amounts, particularly if they are a large sum, is for the share in the ownership of the property to be equal but for each person’s deposit amount to be taken into account when calculating the mortgage repayments, so that those who put down smaller deposits have a bigger share of the mortgage. When it comes to one owner leaving or the property being sold, each person’s share in the profit is determined by calculating their share of the current balance of the mortgage deducted from the current market value of their share. This is fairer than taking an equal share of the gain plus giving each person back their deposit amount, as those who have been paying more towards the mortgage as a result of their lower deposits will actually have been paying more towards the capital than those who paid lower monthly amounts because of their higher deposit.
There are several different ways in which a person’s circumstances may change, thereby affecting their share of the mortgage and property. The details of what will happen in such situations should be ironed out in the legal agreement.
If for any reason one of the joint owners wants to leave, there are various possible options:
the person keeps their share of the mortgage and property and rents out their room
the person sells their share to the remaining owners who can then rent out the room if they wish
the share is sold to a third party in direct replacement of the person leaving
the whole property is sold and all parties leave.
Insurance should be taken out as part of the legal agreement to cover situations in which people are unable to continue paying their share of the mortgage for a period of time, for example because of illness, injury, redundancy or death. For illness or injury, insurance cover will normally make their repayments for them for up to a year, and if the person is still unable to make repayments after this, their share of the property will almost certainly have to be sold.
If one of the joint owners dies, life insurance will provide a lump sum to pay off the person’s share of the mortgage, and, depending on the legal agreement drawn up, their share of the property will become part of their estate. Writing a will is a sensible precaution for ensuring that the deceased’s estate is distributed according to their wishes.
There are other things you’ll need to agree such as whether third parties can live at the property, and if so, for how long. You’ll also need to decide how you’ll split the fees for buying and selling the property.
All of these issues should ideally be specified in the agreement, which is best drafted by a solicitor to ensure that it’s fair and legally binding and covers all eventualities. Joint ownership with friends should be an enjoyable experience and you wouldn’t want to lose out on friendships or money as a result of misunderstandings.