Couples have traditionally purchased homes together, but keeping pace with modern trends and due to the increase in house prices, the idea of pooling resources to buy a home with a friend or work colleague is becoming an increasingly attractive option for many homebuyers. In particular, in London and its suburbs, where house prices and therefore deposits can often be beyond many on a single income.
Funding for this type of purchase is also starting to become more available with a range of lenders now considering this as an option when assessing mortgage applications.
There are many issues to consider before deciding to set up home with a friend or friends and it is worth having a full overview of the legal and practical implications before setting your heart on sharing your home.
Explore all of your financial options
While there are more lenders out there willing to consider this kind of co-purchase, not all of them do. Therefore, your mortgage options may be limited which may drive up mortgage costs. Take advice from a reputable mortgage broker or financial adviser and look at the range of product options. Don’t hesitate even at this stage to take their advice on all of the options open to you which may include options to buy on your own such as shared ownership schemes or renting rather than buying together.
You should consider a broad range of options and have an overview of all surrounding costs, such as mortgage arrangement fees, legal and insurance costs and rent and service charge costs (if you are buying an apartment) so you can fully review the available options and decide if buying in this way is really right for you.
Agree on your property criteria and budget before you go to view
Agree from the outset what type of property you want and how much you can afford to pay. Don’t forget to leave some contingency in your budget for unforeseen costs and expenditure.
It is very easy to view a property and fall in love with it on the spot but don’t pick something that one of you would struggle to afford more than the other or that is at the top end of your budget without taking into account the legal, valuation and mortgage brokerage costs. Otherwise, you could up with an imbalance in your finances right from the start.
You should sit down and budget together carefully ideally before you start viewings so you all have a clear picture of what you can realistically afford while leaving a little contingency for unforeseen expenditure and repairs
Set out all your contributions in writing
Land law is still behind the times when it comes to its treatment of property shares. Particularly on the death or bankruptcy of an owner. It still assumes that contributions and payments are on a 50/50 split unless set out otherwise. It is therefore vital to get a Declaration of Trust drawn up which can give a detailed breakdown of who has contributed what to the purchase, including your legal costs, and what will happen to the proceeds of sale following a disposal of the property. This can serve to protect not only your individual contributions but also money that someone else such as a parent has given to you as well.
Agree the basic ground rules for sharing your home
Whilst some things can’t be covered off by legal agreement many things can. A Cohabitation Agreement is a great way to make decisions in advance such as who will pay what share of the bills and how you will fund emergency repairs. You can also set out rules for more practical aspects like what happens if one of you wants a new partner to move in or to rent their room to someone else rather than live there.
Beware ‘joint and several’
When you purchase a property with someone else you create a financial link with them. This means their spending behaviour can influence your own credit score. If they run into financial difficulties the law considers most debts, including mortgage and utility payments as ‘joint and several’. This means you jointly enter into the contract to pay them but if one of you cannot or won’t pay the bill at the end of the day the lender or creditor can pick the more financially stable party to pursue for the debt on their own. It’s a big financial commitment to link yourself with someone in this way whether you are a couple or just friends so we would suggest a full and frank discussion with your co-owners about your finances is essential before going down this route.
Hope for the best but plan for the worst
Redundancy, death, serious illness and bankruptcy are all matters we would hope never happen to ourselves or to those close to us but they are all eventualities that when looking at buying property together is sensible to plan ahead for. Wills, insurance to cover payments if one of you can’t work and full disclosure of your banking history and any savings, life or other insurance policies is again vital to make sure that should something happen to one of you, the other will not be left with a property they cannot afford.
Wills and Life Insurance
These are both crucial steps and you should take the time to take advice from a qualified professional in respect of both your wills and insurance arrangements. If the laws relating to property shares are still a long way behind the times, inheritance law can be even more inflexible. If you don’t plan effectively for what will happen to the property shares if one of you dies then you could end up having to sell very quickly or share your home with a family member or beneficiary of your friend or someone they choose.
Next steps? What is the plan if you or your co-owner change their plans unexpectedly
Remember best laid plans can always change. Eventually you will want to sell and move on and this may not be together or at the same time. You need to consider what would happen if one of you wants to sell their share and whether you would be able to buy them out and remain in your home or whether you would need to sell and move on independently. Bear in mind that whether the eventual move is to acquire the property in full or to go your separate ways, you need to budget for the legal costs, estate agents fees and valuation fees that will need to be paid. You will also need to agree a value for your home and having a method in your Declaration of Trust already set out for this to be independently set by a surveyor is a great way of ensuring that the division of your joint home does not put an end to your friendship.
Key Things to Remember
It is vital to make sure you get the full package of legal and financial advice. Even if it costs a little more upfront it may save you a fortune if things don’t go as planned.
Making sure you access professional advice can never prevent issues arising but it can mean you have the best possible plans in place should issues arise.
Which leaves you free to just worry about your co-owners annoying little habits and not your future financial well being!