The last 20 years has seen a huge increase in property values, meaning that many first time buyers are unable to get onto the property ladder in the traditional way. This has led to them finding new ways of buying a home.
Shared mortgages are one of the new and modern investment strategies born out of the difficult times for first time buyers. The idea is not new, as financial secure investors used to use mortgage and property sharing as a way to afford a second property, but the last decade has seen borrowers sharing a mortgage in order to actually afford their first home rather than throwing dead money into a rental property.
But is it really a good way of getting onto the first rung of the property ladder? Well, in short it works out for some people and others won’t see things pan out as they’d expected. Lenders will often accept four people on a mortgage for a property, and they will usually allow two and a half times gross salary of all parties involved.
When buying with friends or colleagues, it is vital that you avoid potential problems later on by ensuring the contracts are clear out the outset. Make sure that all contractual obligations are understood from the start and that you know what you are getting yourself in to.
Every member of the agreement is both is party is individually and collectively liable for repayment of the mortgage. Which means and many don’t quite understand this but if one member fails to pay, the remaining members have to make the full repayment. Shared mortgage are often taken out between friends, which could be classed as mixing business with pleasure, you have to ask yourself if that is going to work for you?
You can imagine that this type of mortgage will be suited to those who lead a singles life and that those who are sharing the mortgage are of a similar background or circumstances. Though it would probably be best to expect that at least one member of the group will have their circumstances change during the period of the mortgage. This could be relationship or work related.
Make sure also that you enter into a formal agreement about how the property should be divided between the joint applicants. You can either divide the mortgage and property into shares ‘in common’ or as ‘joint’ shares.
If you go down the route of ‘shares in common’ each person can own an amount decided between all parties involved, so if one person pays more of the deposit for instance, they can be listed to own a larger share of the building. In both types of ownership, if one of the borrowers dies, the other borrowers have legal protection to avoid ‘messy’ circumstances, and the remaining borrowers can decide what to do with the other share – i..e buy it out.
For many people, obtaining a shared mortgage to buy a property is the only way that they can afford to get onto the property ladder, as house costs have increased beyond affordability for the average wage, especially for single people. A shared mortgage is not a decision to be made lightly however, as you must remember that life is a winding road and change is inevitable – especially in the near future if all parties are young. As mentioned before people settle down, and other move on so be prepared.
With the correct advice and the right contracts in place, a shared mortgage can be a great way of getting on the first rung of the property ladder.
Howard writes for Just Commercial Mortgages the UK’s No1 site for the latest commercial mortgage rates and commercial property finance news.