The Declaration of Trust
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.