Buying a house with friends

In some areas, even one-bedroom or studio flats are unaffordable to young people trying to buy their first home. This has led to a trend for young people to pool their finances with their friends and take out a joint mortgage together. This has its advantages and disadvantages, but for some it’s the only way to home ownership. Here’s a guide to making joint mortgage arrangements with friends successful, ensuring there is no breakdown in terms of finances or friendships.

Joint mortgages have the same terms and conditions as single mortgages, even when taken out by friends rather than spouses or partners. This means that everyone is equally responsible for meeting the repayments, no matter what they earn or how much capital they provided upfront for the property purchase. However, you may choose to mutually agree your own repayment and ownership terms with the other joint owners. 

Don’t let the fact that you are all friends cloud your judgement on how formal to make the arrangement. Misunderstandings and disagreements can happen easily, even among the best of friends, so it’s important to have a legally binding agreement drawn up by a solicitor at the outset to make sure everyone is aware of their obligations and rights and to protect everyone’s interests. It’s not expensive to have this done, and it’s definitely worth the fee in the long term.

You’re all likely to be on different salaries, although the mortgage lender simply combines them all to establish the lending amount and doesn’t allocate different sized ‘shares’ to reflect the differences in salary. However, you can do this in your legal agreement. Bear in mind that you don’t have to define ownership or how much each person should pay towards the mortgage repayments in terms of salary. It’s entirely up to yourselves.

In addition, some people are also likely to have provided different deposits to secure the property as some of you will have more savings than others. Again, all the joint owners should discuss and agree whether and how this will be taken into consideration in the legal agreement in terms of ownership and repayment shares.

One way of doing this is to agree that everyone will get back their deposit from the proceeds of the sale of the property before the rest of the profit is divided in equal parts. This depends on how of a profit the property makes when it sells, and also may not work out well if large sums were paid as deposits.
Another way of ensuring fairness to those who paid bigger deposits is to maintain equal ownership of the property but to have smaller repayment amounts than those who provided less for a deposit. Then, when you sell the property or someone moves out, the shares in the property are calculated by deducting each person’s share of the present mortgage balance from the present market value of their share. Some people would argue that this is the fairest way, rather than everyone taking an equal share but getting their deposit amount back, because the owners with bigger monthly repayments will have paid off a bigger chunk of the capital than their flatmates who had smaller monthly repayments as a result of larger deposits.

The biggest issue is deciding what to do if anyone wants to move out. There are several ways in which you could deal with this, and you should decide in the written agreement what you want to do:

• you sell the property, so everyone has to leave

• the flatmate leaving puts their share of the property up for sale so that a new joint owner replaces them

• the remaining joint owners buy the leaving flatmate’s share of the property (perhaps letting out their bedroom)

• the leaving flatmate keeps the agreement and simply finds a tenant for their room – so they still have joint ownership and responsibility for the mortgage repayments

It is wise for everyone to arrange insurance as repayment protection – and to stipulate this in the agreement – so that there are no problems if one or more of the joint owners struggles to meet their repayments for any reason (for example, if they become ill or lose their job).

Life insurance is also a necessity. It will pay off the mortgage share of the policyholder if they die. Another essential issue to iron out is what will happen to the person’s share of the property in terms of their estate. Each joint owner should have a will drawn up.

There are lots of other small eventualities that could become big issues if not discussed and agreed in advance. Having others frequently stay over at the property, for example, can cause quite a bit of friction. State in the written agreement whether you will allow this.

It may seem like such a formality among friends, but a legal agreement drawn up by a solicitor is the only sensible way to proceed in order to protect your friendships and your financial interests and to ensure that you all have a great time living with each other.

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