It
is a very good idea to draw up a legal agreement known as a
"Declaration of Trust". This is a document that sets out, in
a legally-binding manner, the conditions of the joint ownership.
For example:
What percentage of the property each person will own
What percentage of the deposit each person will pay
What proportion of the monthly payments each person will
pay
Any other details - who will have the largest bedroom, for
example?
What happens if one person wants to sell their share and
leave?
If the property is sold, what proportion of the profits
will each member get?
What is the aim of buying the property
For
example, a group of young professionals might decide to buy
a property as an investment for 4-6 years, after which they
will sell it.
By
then they will probably want to buy their own places and will
be able to afford to so this.
Inevitably,
there will be scenarios where one person wants to leave or is
unable to pay their share - perhaps through sickness or redundancy.
A Declaration of Trust document makes legally-binding provision
for situations like this.
Things to Consider
How Much
Can I Borrow
Mortgage
lenders have always considered joint mortgages - even those
held by married couples - to be more risky than singly-held
mortgages.
Logically,
mortgages held by three or four people will be more risky still
- the dependency on multiple people for each month's payment
and the potential for unforeseen problems affecting at least
one borrower means that lenders are always a little more cautious
with group mortgages.
Different
lenders have different policies for calculating how much can
be lent on a group mortgage - examples include:
2.5 times all incomes
2 times the highest two incomes, plus the sum of the lowest
two incomes
4 times the highest income, plus the sum of the remaining
incomes
Which policy
will be the best for your group depends in part on how much
disparity there is between the group members' incomes - for
example, if one person earns considerably more than the others,
you might want to choose a policy that weights the largest income.
Group Mortgage Risks
A group
mortgage does not have to be much riskier than a regular joint
mortgage, of the kind held by most married couples. However,
there are a few differences:
Typically three or four people are involved
Friendships can be tested by living together for years
If one person decides to leave, the others may be forced to
sell
Even agreeing on colour schemes can be difficult!
You will
often find that lenders will insist on a Mortgage
Indemnity Insurance Policy being taken out to protect the
lender from members who default on a group mortgage.
This can
be a considerable expense. Not all lenders require this, though
- a specialist
mortgage broker will be able to dig out the best deals for
your group.
The main
risk for a borrower is of one or more of the group wishing to
leave, and the remainder of the group being unable, or unwilling,
to buy out that person's share.
At present,
there is a limited market for mortgage shares, and the likely
end result would be that the property would have to be sold.
It is vital
to have an effective Declaration
of Trust in place so that all members of the group understand
what will happen if any changes are required, and all members
of the group will receive a fair and pre-agreed settlement if
the property has to be sold unexpectedly.
Group Mortgages
- The Benefits
Properly
planned and considered, a group mortgage offers a fantastic
opportunity for a group of buyers to get on the property ladder,
and escape from renting or living with family. For many first-time
buyers, this type of mortgage represents the only possible means
of getting on the property ladder.
Group mortgages
are fairly widely available now, but not all lenders offer them,
and the deals available vary considerably - watch out for high
interest rates and expensive compulsory mortgage
and home insurance.
Find the
right deal, though, and you could be well on the way to property
ownership, so it can be worth taking advice from a broker to
help find the best possible group mortgage for your group.
Read
enough? Just want a quote? To get
your best mortgage quote quickly and easily we can
put you in contact with a recommended mortgage adviser. It's free,
completely confidential and there's no obligation at all. Simply
fill out the form below
