Getting Your Foot On The Property Ladder – A Guide To Mortgages For First-Time Buyers
Chapter Four
Story Highlights:
This chapter examines the different ways which enable you to buy a house with someone else with full explanations about:
- Factors to think about before buying a house with someone
- Joint Tenancy vs. Tenants in Common
- The pros and cons of joint ownership
- Joint property and what happens if you decide to go your separate ways
- Drawing up a Joint Tenancy Agreement
- Applying for a joint tenancy mortgage
- What guarantor mortgages are
- The pros and cons of guarantor mortgages
- Shared ownership schemes
- Eligibility and applications for shared ownership schemes
- The pros and cons of shared ownership – what stair-casing is, availability of shared ownership, your rights, selling the property
Buying property with someone else or someone’s help
High house prices might not allow you to buy a house alone since prices can be around 7 times (or even 12 times in London) your annual salary. One solution to this problem could be to purchase property with someone else or buy it with someone’s help. Alternatively, there are a number of shared ownership schemes which allow you to buy a share of a property making the sale price much more affordable especially for the first-time buyer.
In this chapter we’ll be considering Joint Tenants and Tenants in Common, Guarantor mortgages and the availability of shared ownership schemes. We’ll evaluate the advantages and drawbacks of each one, which issues to be careful of as well as the eligibility and the application process.
Buying a house together – Think hard!
You may have shared rented accommodation before and so you probably know the pros and cons of living with someone; the problems of making compromises and making allowances for the other’s idiosyncrasies, arguments about household chores and/or finances and so on.
However, it must be emphasised that buying a house isn’t the same as renting. If you’re renting and you find that you don’t get on, you can give notice to quit, walk away and no harm is done. Buying property together is an altogether different proposition; it’s a binding legal and financial commitment. It’s much more problematic to get out of a joint mortgage and there can be repercussions for your future – not least financial.
Whether you’re planning to buy with a friend or partner, it might be advisable to have a ‘trial run’. Why don’t you rent somewhere together first? In that way, you have an idea of how you get on and how you cope with the financial commitment of renting. Would you really want to risk buying property with someone who can’t be trusted to pay their rent on time or their share of the joint household expenses?
Once you’ve decided that buying a house with someone is the right thing to do, it’s time to look at your options. There are 2 ways of taking out a mortgage together: Tenants in Common and Joint Tenancy. Before we look at the advantages and disadvantages of purchasing property together, let’s look at what the difference is between them.
Joint tenancy vs. tenants in common
Joint Tenancy (or Beneficial Joint Tenancy) means that in the eyes of the law, you own the property together and so you should act as a single owner. On the death of one of you, the other half of the property would automatically pass to the other person and you couldn’t leave it to someone else in your will. This type of joint ownership is most commonly used by married couples or people in civil partnerships.
By contrast, Tenants in Common means that you possess your own defined share of the property and this doesn’t have to be equal shares. It’s quite possible to sell your own share of the property separately and on death, your share will go to a beneficiary named in your will or a close relative instead of your co-owner. This type of joint ownership is more commonly used when friends or relatives purchase property together.
Summary:
Although you may have rented with someone before, buying property together is a commitment which makes it more difficult to walk away.
You could rent with someone first to make sure it’s the right decision for you both.
Joint Tenancy is often used by married couples and it means you own the property jointly with it being transferred to the other automatically in case of death.
Tenants in Common means you each possess your own distinct share and you can do with this as you wish on your death.
The pros of joint ownership
The major advantage of joint ownership is that it allows you to look at much more expensive properties than you would have been able to buy on your own because the mortgage would be given on a dual income. These houses could be bigger and/or in better areas. The only downside to choosing the property together is that you might have to compromise on location as you might not necessarily work in the same area as your co-owner. You may not have the same ideas about what amenities and facilities you’d like nearby either but this is something you can work out during your house-hunting.
Apart from sharing the mortgage repayments, you’ll also be able to share all the associated costs of buying property. With both of you saving towards the deposit, you could save much faster. Alternatively, you might choose to wait longer to have enough money for a larger deposit. This will give you access to a better mortgage with a lower interest rate. All the other costs with taking out a mortgage such as Stamp Duty and conveyancing fees will also be halved.
The cons of joint ownership
When you apply for a joint mortgage, both mortgagees’ credit scores are taken into account so you may have your mortgage application turned down if they have a poor credit rating. The reason why mortgage providers do an affordability assessment of both applicants is that, by law, if one of you default on their share of the mortgage repayments, then the other becomes liable for the debt.
Joint ownership allows you to look at much more expensive properties than you would have been able to buy on your own because the mortgage would be given on a dual income.
This is an issue that you really need to think carefully about before buying property with someone and why you should be sure of their trustworthiness. If the worse comes to the worse and the property is repossessed, it’ll affect your credit record for years to come and through no fault of your own.
Questions:
Are there different rights for people with Joint Tenancy or Tenants in Common?
No. You have exactly the same rights in the eyes of the law. The property can’t be sold and nor can you be forced to leave without a court order. Also, additional loans can’t be taken out on the property without your consent.
We’ve decided to marry. Can we change our joint ownership from Tenants in Common to Joint Tenancy?
Yes, you can change from one to other without paying any fee to the Land Registry. However, you must have the written consent of all parties.
What about changing from Joint Tenancy to Tenants in Common?
You need to complete a ‘severance of joint tenancy’ and apply for a form of restriction; consent of the other party isn’t needed. This can be sent to the Land Registry and there’s no fee.
How many people can legally own a property together?
Up to 4 people can legally own property jointly.
Joint ownership – Going your separate ways
Another drawback of joint ownership is what you would do if you decided you no longer wished to own the property together. This could happen for a variety reasons. It could be that one of you has been offered a promotion in a different part of the country or perhaps you’ve been living together and decide that your relationship isn’t working out.
This can cause enormous problems for both of you. If you wish to remain in the house, could you offer to buy out the other person’s share? Often this is difficult if you’ve taken out a mortgage with the understanding that repayments are split down the middle. There might be financial penalties from your mortgage lender if you are locked in at a fixed rate (the ERC or Early Repayment Charge). For the person who wants to leave, how will they be able to afford mortgage repayments as well as renting elsewhere until the matter is settled?
Summary:
Joint ownership allows you greater choice of more expensive property although you may have to compromise on location, etc.
Buying a house with someone else allows you to save for a larger deposit and/or more quickly and mortgage fees can be split down the middle.
One drawback is that you’re both liable for mortgage repayments so if your co-owner can’t pay, it can have consequences for you and your credit rating.
If you decide you no longer want to have joint ownership, there can be difficulties in deciding what to do about the house.
Drawing up a joint tenancy agreement
One solution to the problem of what to do if one of you no longer wishes to share ownership is to draw up a form of Joint Tenancy Agreement. In this document, you lay out under what circumstances the property can be sold, how much notice must be given and the proportion of the sale price each of you is entitled to. You should also address the issue of one of you buying the other out and how to arrange a fair evaluation. Finally, you ought to think about what you would do if the house has negative equity. In other words, it’s worth less than you paid for it.
You should both keep a copy of this document and sign and date it. It’s better to think about this before you buy together since the only alternative if you can’t agree is to go to court. This can quickly become much more acrimonious and cost you both time and money.
Applying for a joint ownership mortgage
Applying for a joint ownership mortgage is much the same as any other mortgage application but both of your incomes and outgoings are assessed by the mortgage provider. If there are 3 of you buying property, the lender takes into account the affordability assessment of the two highest earners. In such a situation, you may have to shop around more for a mortgage since not all financial institutions offer loans to more than 2 mortgagees.
Guarantor mortgages – What are they?
A guarantor mortgage allows a family member (or friend) to put up an asset (property or savings) as a safeguard to the mortgage provider. If you default on repayments, then the lender holds a charge on their property or can withdraw money from the savings account. This type of mortgage is often used for mortgagees with a low income, no deposit or for first-time buyers. Guarantors can also be used if you wish to borrow more than you could afford on your income (also called an increased borrowing mortgage).
Not everyone can act as a guarantor for you since some mortgage providers stipulate that it must be a parent, step-parent or grandparent and also impose other restrictions. For example, the guarantor must have a good credit rating, own at least 30% equity in a house, etc.
Pros and cons of guarantor mortgages
The advantage of a guarantor mortgage is obvious; it lets you apply for a mortgage and buy property so much more quickly and without necessarily having to spend years saving up for a deposit.
However, the nature of this mortgage means that your guarantor will be liable for the debt if, for any reason, you’re unable to meet your mortgage repayments. This can have financial repercussions for them. In the worse case scenario, they could have their home repossessed or lose their retirement savings. This is something that you’d both have to think about very hard and in fact, mortgage providers often require proof that the guarantor has received advice from a FCA-approved financial advisor or solicitor.
From your point of view, how would you feel if this happened to a member of your family because of you (even if the default was due to circumstances beyond your control)? And what would it do to your relationship afterwards?
Shared ownership schemes
Another way you can buy property jointly is if you apply for a shared ownership scheme. In this case, the other part of the property is owned by a housing association and you own a proportion of between 25% and 75% with the possibility of buying a bigger share later.
With this scheme, you take out a mortgage on the share you purchase but you pay rent on the remainder at a reduced rate. It could be seen as a compromise between buying and renting and is primarily aimed at first-time buyers and/or people who don’t earn enough money to buy property outright. The majority of houses are new-build but you may also find property which is being resold by housing associations.
Eligibility and applications for shared ownership schemes
Each country in Britain has a slightly different scheme but in England to be eligible for shared ownership, you have to be a first-time buyer or used to own a house but now can’t afford one; have a combined income of under £80,000 (or £90,000 in London) and rent from a council or housing association. Priority for these schemes used to be given to key workers (such as nurses) but now this only applies to military personnel.
To apply for shared ownership, you should speak to the Housing team in your local council or housing association.
Summary:
Drawing up a Joint Tenancy Agreement will help you anticipate any problems before you purchase a house together.
Joint mortgages are assessed on the earnings and outgoings of both mortgagees (or the 2 highest earners if you’re more than two buyers).
Guarantor mortgages allow a family member or friend to put up property or savings as security for your mortgage.
Such mortgages let you take out a mortgage more quickly and easily but are a risk for the guarantor.
Shared ownership schemes mean you part-buy and part-rent a property but must meet the eligibility criteria.
Questions:
How many people live in shared ownership schemes?
According to a report by the Council of Mortgage Lenders, there are 200,000 households which are shared ownership (or 0.4% of English housing stock).
How much do people in shared ownership schemes earn?
In the same report, they found that the average salary for people in shared ownership schemes was £24,000-£34,000 (but £45,000 in London).
What schemes are there in the rest on Britain?
Northern Ireland has a Co-Ownership Scheme, Wales has the Home Buy Scheme while Scotland has no shared equity scheme at present.
Do I still have to pay Stamp Duty when I buy a shared ownership property?
You’re only liable for Stamp Duty if property is worth over £125,000. For shared ownership, you can pay for the full market value (if you’re intending to increase your share in the property) or you can pay on your initial share (although you might be liable to SDLT on your annual rent).
Pros and cons of shared ownership schemes
What is Stair-Casing?
Apart from the fact that shared ownership often works out much cheaper than renting, getting a foot on the property ladder is more accessible for people who would otherwise be unable to afford to buy.
The other major advantage is that the scheme allows you to increase your share of the property (also known as stair-casing) as your circumstances improve and you start to earn more. You can slowly build up your equity and after you own 75%, you would no longer have to pay rent.
However, before entering into a shared ownership scheme, you should check the regulations regarding stair-casing since there might be a minimum amount you’re allowed to buy (such as 10%) or it might be restricted to a set number of times. Also, bear in mind that unless you have saved the money, stair-casing might involve a remortgage and the costs of conveyancing all over again. Further shares will also be sold at the current value of the property, which is probably going to be higher than your initial purchase price.
Availability of shared ownership
In 2015, the government made a commitment to build 135,000 more shared ownership properties by 2020 but when you think about it, this isn’t very much. One of the disadvantages of these schemes is that you may not find property in the area you’d like to live. You also may be limited in the number of mortgage providers who would offer a loan to buy shared ownership and restrict your choice in finding competitive terms.
Sub-letting under shared-ownership is strictly forbidden whilst you’ll have to notify the housing association if you intend to make any changes to the property.
Your rights under shared ownership
In England, shared ownership schemes are sold under a leasehold basis only, which means you’re liable to a service charge. Also, the fact that it’s part-rent limits how much control you have over the property. Sub-letting is strictly forbidden whilst you’ll have to notify the housing association if you intend to make any changes to the property (in some cases, this even includes redecorating).
The question of eviction is something that you should also think about. Although you have a share in the property, your housing association is within their rights to evict you if you get into arrears with your rent (and even if your mortgage repayments are up-to-date). If this happens to you, you’ll lose your share of the property and will have no legal redress.
Selling shared ownership properties
You have the right to sell your shared ownership property at any time. However, your housing association has the first refusal (in some cases for up to 21 years after your original purchase). They will have a set period of time to find a buyer before your home can be put on the open market. This can be a slow process and might cause problems for you if you wish a quick sale. Even when you put the property on the market, you might find it difficult to sell since prospective buyers will have to meet the scheme’s eligibility criteria.
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