A Comprehensive Guide to Buying a Property with a Friend
In recent years the price of buying a home in London has increased beyond the financial means of the majority of first time buyers, certainly for those on low to medium earnings and without access to substantial savings.
Shared Ownership has become a tried and tested way of bridging this affordability gap and is increasingly the default tenure for first time buyers. It allows the chance to buy a share in a property (between 25% -75%) and pay a low rent on the remainder. Further shares can be acquired in the property as finances and budget allows.
Why you would consider buying a property with somebody else?
A small but significant number of people have, however, historically considered buying a property with a friend on the open market as a way to improve their chances of being able to raise the required finance. On face value this makes sense, however, is it all as good as it seems?
The pros of buying a house with a friend
Pooling your resources with somebody and jointly applying for a mortgage will allow you to afford a more expensive property, be it bigger or in a better location. If you're buying shared ownership, buying with somebody else - whether a partner, a family member or a friend - will let you buy a bigger chunk of your home and, potentially, staircase to 100% sooner than you would have on your own.
If you are looking at buying shared ownership on your own purchasing on the open market with a co-buyer, the latter option might seem more attractive since;
- You will end up owning your property outright and benefit from any increases of its value. By contrast, if you buy shared ownership property, any price hikes will make buying further shares in your property more expensive, making it difficult for you to staircase to 100%.
- Owning your property outright means that you don't have any restrictions attached to shared ownership properties:
- you can sublet your property without restriction,
- you can sell your property on the open market, whereas when selling Shared Ownership you need to give the housing association eight weeks to market your home before going to the open market.
The cons of buying a house with a friend
On the down side, there is a lot that can go wrong when buying a property with somebody else. While getting a joint mortgage might increase your purchasing power, if your co-buyer has a poor credit score it might hamper your chances of getting a mortgage in the first place.
Also, getting a joint mortgage has it's down sides too. You will find that you will be “jointly and severally liable” for the debt, which means that should one of you default or fail to maintain the mortgage repayments, you may be wholly responsible for the full mortgage.
Another issue relates to what happens when joint ownership ends due to one of the owners dying or if one of you wishes to sell the property. Essentially there are two types of co-ownership in the UK - joint tenancy and tenancy in common - and your rights greatly depend on which one you choose.
Which is better: joint tenants or tenants in common?
As joint tenants, both of you own the whole of the property. You will not each have a quantified share in the property and will not be able to leave a share of the property in your will. If you sell your home, the sale proceeds will be split 50:50. If you die, your share automatically goes to the surviving owner. What's more, you cannot sell your share of the property if the other owner does not agree. In this case, if you want to get out of the joint ownership, both of you will need to sell the property and split the proceeds.
As tenants in common, each of you owns a share of the property which they can sell or leave to their heirs in a will. Also, tenancy in common allows you to enter additional agreements in a document called a Declaration of Trust, where you can specify:
- who owns what percentage share of the equity,
- a mechanism for one party buying the other one out.
You can find out more about becoming joint tenants and tenants in common in this article.
Preventing problems down the line
Choosing to become tenants in common and putting the Declaration of Trust and your will in place will prevent a lot of problems down the line. By speaking honestly with your co-owners about your expectations will allow you to agree in advance on what will happen in certain situations.
What happens if you have unequal deposits?
If one of you contributes more to the deposit - say, 70% while you provide the remaining 30%, you may specify in your Declaration of Trust that when you sell the property the proceeds will be split in the same way (70/30). If you don't agree that in your Trust Deed (Declaration of Trust), the proceeds will be split 50/50 by default irrespective of how much each party contributed initially.
What happens if one of you earns much more than the other?
Similarly, if one of you earns more and, consequently, contributes more to repaying the mortgage, paying bills, etc.; you - again - may decide in the Trust Deed that you will be entitled to a greater share of the property. Without the Trust Deed agreement the presumed ownership is 50% share of the total property (when two parties are involved).
How to go about getting a property with a friend?
Getting a property with a friend, partner or a family member is relatively straight-forward. You apply jointly for a mortgage and start shopping for suitable properties. There are, however, things that you can do to make the process less risky down the line:
Get advice from an experienced solicitor
Whether to become joint tenants or tenants in common, whether to put in place a Trust Deed and draft a will - all of these are not decisions to be taken lightly. An experienced solicitor will walk you through all possible scenarios and advise you on the best course of action.
Be honest about your expectations
Are you in it for the long term or are you just planning to get your foot on the housing ladder and sell early. Or perhaps you are thinking of going for buy-to-let or let our your London property on Air B'n'b? Whatever your expectations, it is important that you discuss them with your co-buyer before you get a joint mortgage.
Be honest about your financials
How much can you realistically contribute and - if your contribution is greater than your partner's - are you okay about the ownership being split evenly?
Do you trust your future co-owner not to default on the mortgage? Also, you may find it a good idea to set up a joint bank account to pay the mortgage and any other agreed shared expenses. This will make it easier for you to track expenses than if there were going our from separate private accounts.
Is flat-share a good solution for you?
Buying a property - especially in London - can be a great investment, but the day-to-day reality is that in all likelihood you will be sharing your newly-purchased home. Are you sure that the potential co-owner of your flat is somebody you can live with on a daily basis? Renting a flat together for a year or so before taking the plunge will show you whether you are able to live with this person under one roof. You will also learn more about their personality, their financial situation, and whether they are the responsible, money-savvy, person you'd want to purchase a property with.
Discuss your exit expectations
If you're buying a home with your spouse or your partner, you may wish to stay there for years to come. But if you're buying with a friend or a family member, they may have different ideas about their exit expectations. They may wish to hold on to the flat while you want to sell after 5 years. Or you may wish to remortgage and trade up while they wish to stay where they are.
It is crucial that you have these conversation before any binding decisions are made. If your plans differ considerably, it doesn't necessarily mean that you cannot proceed with the purchase. But you may talk to your solicitor and put provisions in your Trust Deed that will make sure that both parties end up happy. For example, you may agree that if one person chooses to sell, the other person will have priority in purchasing the other share, which will allow them to stay in their home even if the other person wants to get out.
Family Mosaic would like to thank Andrew Theoff from Direction Law - one of our panel solicitors - for contributing to this article.