Mortgages with friends?

October 7, 2005 11:30 AM

MortgageFilter: I'm in the UK, and starting to look around for a house. Yes, I'm going to see an Independent Advisor, but for one reason or another, I can't just yet. So I thought I'd ask here first...

I'm not looking to live on my own, and unfortuantely, not with my girlfriend at the moment. For the near future, it's myself and my friend who are wanting to get a house.

How does the mortgage work in this manner? Friends (not lovers, partners, married, common-law couple etc.) paying a mortgage on a house together?

My friend is on a lower income than me [although we both have solid income that I believe is a very good monthly income], but has a large savings balance that he suggested we use for a deposit.

Is the whole thing likely to work better if it were just me alone, or with my partner? Or is it not as uncommon a circumstance as I seem to think it is!?

posted by nafrance to work & money (2 comments total)

In most cases in the US, lenders will allow only the the borrower to have title to the property. Thus, you may not want to have a lower income partner with uncertain tenure to have title to the house.

Immediate solution: Buy the house yourself, in your name. Make your friend a tenant who pays rent to you.

Long-term solution: Once you're in a permanent situation with some with whom you want to share the property, file a "quitclaim deed" or "bargain and sale deed" that adds the other person's name to the title. In my state, it's a one-page form that takes 10 minutes to fill out and ~$25 to file.
posted by GarageWine at 12:54 PM on October 7, 2005

It's not necessarily the mortgage that's going to be the biggest thing to sort out, it's the shares you each own in the property.

There are two ways of owning property in England - jointly or in common. If you own the property jointly, if one of you dies, it passes automatically to the other party. You are each deemed to own the whole of the property equally.

If you own it 'in common', you can specify at the outset whether it is 50-50, 60-40, etc, and you can also leave your share in the property to whoever you want to in your will, the co-owner won't automatically inherit your share if you die.

So what you will need to ascertain, by doing some probably qiute difficult sums, is whether big deposit + lower monthly contribution = smaller deposit + bigger monthly contribution.

It's also important to both be clear on the circumstances in which one of you can ask the other either to buy out his share of the property or to sell it (for example, by giving three months' notice, or if one of you decides to move out, or move a partner in, etc.).

When you've decided what proportion each of you will own, and the events that will trigger a buy-out or sale, your solicitor can draw up a simple deed of trust evidencing this. Don't think you can deal with this after you've bought the property! You must sort this out as part of the conveyancing and the transfer of the property into both your names.

As for the mortgage, lenders usually look at income multiples and a good financial adviser will be able to steer you towards a suitable lender.

I would suggest avoiding an interest-only mortgage supported by some kind of 'repayment vehicle' - such as ISAs, PEPs, endowments, etc. Practically none of the investment products designed to pay off mortgages sold in the last 20 years have performed as hoped, leaving borrowers with a shortfall on maturity. A standard capital-and-interest repayment mortgage, whilst giving you higher monthly repayments, will at least pay off the mortgage, although this will be slow in the early years.

The IFA works on commission and will be looking to sell you investment products. Bear that in mind.

Also, have a look at the Virgin One account where you can offset the balance in your current account and interest on any savings against your mortgage account. That's a good option - unless you overdraw each month and cannot save.

The final thing I'd say is that buying a property, like marriage, is much easier to get into than out of. So if you have any doubts about buying with your friend, I would think long and hard about whether you want to tie up your finances with him. The legal wrangles involved when house-owning friends fall out can be very expensive and stressful.

Apologies for length. In mitigation, unlike most of what I write on MeFi, this is something I actually have some knowledge of.
posted by essexjan at 4:04 PM on October 7, 2005