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Have you ever thought about buying a house with friends? Whilst many of us may be thinking about owning a home with a partner one day, buying with a friend or two could be the way to property ownership. It’s harder than ever to get a foot on the property ladder with increasing house prices and stricter mortgages, so considering the option of buying with a friend instead may be a sensible first step.
Obviously though, as well as some great advantages to this there are a few pitfalls to avoid. Keep reading to learn more about how to decide if it’s a good idea, what the main advantages are, how to get a joint mortgage, and how to sure you’re protected if things go wrong.
Getting a joint mortgage is always much more affordable than getting one on your own. Lenders look at the combined income when considering how much you are able to borrow. So, if you’re splitting this between two, three, or four of you, then you can afford a bigger mortgage.
You need to be careful before jumping into any decision though. Think about the pros and cons of buying a house with friends and whether it’s actually suitable for your personal circumstances. Do you have any existing debt? Do you have job security? Are you sure you can live with the people you’re buying with?
You need to make sure you have complete trust in the person, or people, you commit to getting a mortgage with. Any failures on their part to make payments will negatively impact you and your credit score, not to mention your friendship. It’s a good idea to act like a bank with each other – look at their credit scores and financial history so you know what you’re getting into and hopefully there’ll be no nasty surprises later on.
Not all lenders offer mortgages for those buying a house with friends. Speak to an independent mortgage broker – all of you, together – to clarify your current financial situations and find the best deal.
There are lots of advantages in this kind of situation. The appeal of buying with friends is clear when you consider that:
Not only do you share the cost of the deposit, mortgage repayments, and fees, but you can split the cost of any necessary property maintenance and repairs that need to be done.
Tight mortgage requirements mean for most lenders you need a minimum credit score of 680 and at least a 5% down payment. This makes it much harder to qualify on your own, but with more people contributing to the mortgage your odds of approval increase. Lenders will also often only take the two highest incomes and credit scores into account when calculating a shared mortgage. (If any of you has a bad credit score, though, this will impact the overall mortgage affordability).
Let’s say you’ve saved £15,000 towards your deposit. On your own, that won’t get you very far. But if four of you each have £15,000, your total deposit is now £60,000. You can afford a bigger mortgage and/or get much better interest rates.
If you’re already renting with the friends you want to share with, you’re wasting money together. What you currently spend on rent could be going towards a mortgage. In fact, your monthly outgoings will likely reduce, too: mortgage repayments are (generally) cheaper than rent! Let’s say the four of you live together now and you each pay £500 on rent. That’s a monthly cost of £2,000! For a property costing £300,000, with a deposit of £60,000, your monthly costs will be around £1,100 a month. Between four of you! So instead of forking out £500 on rent, you’re paying almost half at £275.
Not only do you pay less each month, you’re paying towards an investment asset. So, when you decide to sell up, you and your friends will walk away with the money from the sale of the house. This is compared to leaving a rented property where you walk away with…nothing. If your property has gone up in value, you could sell for more than you paid for it and make a tidy profit, too!
However, while all of those things sound amazing, take time to consider the pitfalls of buying a house with friends, too.
If any disagreements arise that can’t be resolved, unlike renting you can’t simply move out. Selling the house, selling your share, or refinancing are your main options. You might be able to get a tenant in to pay rent on your share, if you can’t afford to sell. However, they may not all be feasible depending on whether you qualify and selling a house usually takes months.
Bear in mind that if your friend misses a payment, it can damage your credit score, too. This is because you’re officially tied financially – so their debt on the house is also yours. Keep an open conversation going about your money situations when you’re living together. This will help sudden shocks if someone can’t pay their share of the mortgage. It’ll give you a chance to put safeguards in place, or help them find ways to make extra money to pay for it.
Lenders look at the total amount of credit (debt) available to you. When you’ve got a whopping mortgage on your credit score, relative to your income, it could be harder to get other loans like car finance, personal loans, or credit cards. Hopefully, with the money you’re saving by not renting anymore, you’ll have enough spare capital each month that you won’t need to access more credit. However, it’s definitely worth bearing in mind when you’re weighing up your options.
Four people is the maximum you can have on a joint mortgage. Generally speaking, most lenders will take the two highest salaries into consideration for how much you are eligible to borrow. If you are contributing different amounts for the house deposit you can also decide how you share the equity in the property if it won’t be equally divided.
After you have taken out a mortgage, any changes you want to make, such as borrowing more, will have to be approved by all the borrowers named on the mortgage first.
As you apply for a joint mortgage you need to consider what kind of home ownership you want – you can either be joint tenants or tenants in common. Seeking legal advice before making this decision is wise, but generally people in long-term relationships usually opt for the former while the latter is the popular choice for people taking out mortgages with friends and family.
Always take sensible precautions and don’t rush into any financial decisions. You will need to hire an attorney to create a cohabitation agreement which outlines information to minimise disagreements or problems down the line and protects you and your investment.
A cohabitation agreement should cover:
It’s important that each partner has a will in place. We also recommend having a life insurance policy as well to at least cover the cost of the mortgage should you die or become terminally ill. If someone gets married after buying the house with you, make sure they have a pre-nup in place that clearly sets out what they own.
Another good idea to minimise disputes is keep detailed records of all costs – from the deposit and monthly repayments to utility bills and maintenance costs.
Check out more of our useful articles on mortgage advice and how to get onto the property ladder.