Mates Mortgages – the First Time Buyer Solution?
These are tough times for first time buyers trying to get a foot on the first rung of the property ladder. The high loan to value mortgages of the noughties are consigned to banking history and these days, a deposit of 15% – 20% will need to be raised, along with legal costs, survey costs and all of the other expenses associated with moving in to a new home. In reality this means that first time buyers are needing to raise at least £15,000 to £20,000, often much more to have a hope of buying their first home.
There may be a solution however. More and more people are dealing with the problem of not being able to raise enough of a deposit by getting together with friends, pooling their savings and getting a joint mortgage. These so called “mates mortgages” can allow people who would otherwise have no choice but to rent to get on the property lender years earlier than they would been able to get on alone.
Is it Even the Right Time to Buy?
It is a fair question. After all it is well documented that the bottom has fallen out of the housing market recently and a lot of people have lost a lot of money, but this is why now is exactly the right time to buy. Prices cannot fall very much further and while they are not expected to rise for a few years, it is better to be paying a mortgage in the meantime than to be paying out rent, which is after all just dead money.
Also, interest rates will not remain as low as they are for very much longer. By the time house prices start to rise it is likely interest rates will be higher, meaning larger mortgage payments. Choose the right mortgage deal now and you can secure a great rate for a good few years.
Risks of Buying With Friends and How to Combat Them
Before entering into a mates mortgage it is important to think about the future. Peoples’ personal circumstances, particularly young single peoples’ can and usually do change drastically over time. One of you might meet a partner and decide to set up home with them, maybe you’ll decide to relocate or take a gap year to go travelling. Friends sometimes fall out, especially when moving in together having not lived together previously. Failing to take proper precautions and account for all eventualities can lead to bitter disputes and even expensive legal battles.
One sensible precaution is to spend a few months living together, perhaps while looking for a property. You may find that you are just unable to get on and if that’s the case, it is important to find out before making such a large financial commitment to each other.
You need to have a plausible exit strategy. It is unlikely that you will plan to keep the property in joint ownership through the full 25 year mortgage term so you need to agree on how and when your arrangement will come to an end. You also need to lay down strict rules governing how you will use and maintain the property and how you will deal with outgoings. You may not make equal contributions to the purchase price in which case you will want to make sure that each party gets a fair return on his or investment. These matters can be dealt with by entering into a declaration of trust.
Declaration of Trust
A declaration of trust is an agreement between two or more joint owners of a property which sets out who is entitled to what share of the equity (the proceeds of sale less the mortgage debt, estate agency costs and legal costs) in the property following a sale, who is responsible for outgoings and in what proportion, what happens if one party wants to sell and how a sale is conducted.
You should seek legal advice before entering into a declaration of trust however the following points ought to be considered:
- how will the equity be split upon sale;
- who will make what contributions toward the mortgage;
- what is your exit strategy;
- what about remortgaging in future and;
- who will be responsible for outgoings other than the mortgage?
Some of these points require further explanation. First, what about the split of the equity? If you each make an equal contribution to the deposit and then pay the mortgage in equal shares, you would simply share it equally. What if you make unequal contributions to the deposit however? At first you might think this is obvious – you split the equity in accordance with the each party’s proportion of the original investment.
However, consider the following. You buy a property with cash for £100,000 with person A putting in £25,000 and person B putting in £75,000. You sell 10 years on for £200,000. Person A should get £50,000 and person B £150,000. Simple. Now suppose you take a joint mortgage for £80,000. As for the rest, person A puts in £5,000 and B £15,000m and you pay the mortgage instalments in equal shares. In 10 years’ time you sell for £200,000. By that time you’ve paid £40,000 off the mortgage so the equity is £160,000 (forget costs of sale for a moment). Based on a 75/25 split, A would receive £40,000 and B £120,000. However as A and B have been contributing equally to the mortgage payments they have now contributed £25,000 and £35,000 respectively to the total purchase price. A should therefore receive 5/12 of the equity, or approximately £66,500.
An alternative would be for A and B to contribute to the mortgage payments in the proportions as they contributed to the deposit, thus maintaining the 75/25 split. It is essential that these issues are decided upon at the outset and there should be no assumptions.
An exit strategy also needs to be decided on and agreed in the declaration of trust. You might decide to sell after a certain period of time has elapsed, when the property has reached a certain value or if some event occurs. There should be provision for one party to buy the other out should he or she so wish. There should be a clear mechanism for agreeing when to sell and how the sale price will be calculated.
If these issues are not agreed in advance they may need to be decided in the Courts and the resulting legal costs could easily soak up all of the profit.
Finding a Property Share Partner
Not everyone will have friends who are in a position and/or willing to enter into a joint property purchase. This need not be the end of the story however. There are websites, where like minded buyers can connect with each other. If going down this route, it is obviously essential to get to know the other person over a period of time before making a commitment.
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