It isn’t the best time to be a first-time buyer. Mortgage rates have soared in the past six months, and house prices remain stubbornly high.
Together these conditions put affordability at an all time low. Relative to earnings house prices are the most expensive they’ve been for almost 150 years, as a typical property now costs nine times average wages.
At the same time the Government’s flagship scheme for first time buyers – Help to Buy – ended in Autumn.
A joint mortgage can help you get on the housing ladder by splitting the amount you need for a deposit
But there are still options for those who need help buying their first home. One of them is getting a joint mortgage, where up to three people can buy a property together.
This is the most popular way for first time buyers to fund their home, with analysis by Halifax showing that more than six in ten of the group opt for a joint mortgage.
Commonly used by couples, it is increasingly being used by friends or siblings wanting to buy a home together.
We take a look at how the loan works, its pros and cons, and whether it could be a route for first time buyers to get on to the property ladder.
What is a joint mortgage and how does it work?
A joint mortgage works the same way as a normal residential mortgage – you pay a deposit on the property and then take a loan on the remaining value.
The people named on the mortgage can split the deposit between them, reducing the amount of savings needed per person. Monthly payments can be made together, and a lender will decide how much you can borrow based on your joint earnings.
Similarly, if you want to update the mortgage, all of the holders will have to agree. The same is true if you are changing to a new mortgage deal or different rate with the same lender, or switching lenders all together.
There are two different types of joint mortgages, joint tenants and tenants in common.
Joint tenants all have equal rights in the home, split the profits equally on sale, and will inherit the property if one borrower dies – essentially acting like a single owner.
In a tenants in common arrangement, borrowers have separate interests in the whole property which can be split how they choose. It means that, for example, one person could pay a bigger deposit, in exchange for a bigger share of the value when they sell.
When one of the owners passes away, they can pass their ownership interest on to a beneficiary in their will – rather than the other tenants in common.
‘You don’t need a special mortgage to be tenants in common,’ says Nicholas Mendes, mortgages technical manager at John Charcoal. ‘You simply need a normal mortgage and your solicitor will set up the ownership arrangements.’
Mortgage rates on joint mortgages are the same as those on sole ownership so you won’t be disadvantaged by buying together.
Who can get a joint mortgage?
In theory anyone can take out a joint mortgage, as long as they comply with the normal borrowing standards a lender asks for such as affordability and credit history.
You can usually get a mortgage with up to three other people. They can be friends, relatives or a partner, although lenders differ with what they allow.
There are also options within the products to accommodate different scenarios.
For example, a joint borrower, sole proprietor mortgage is shared between a child and parents. They will share the responsibility for the repayments, but only you will own the property.
Splitting a property with a partner, friends or parents is a popular way for first time buyers to get on to the housing ladder
However, not all lenders will offer this option, so it is always worth talking to a mortgage broker to work out which option works best for you and what deals are on the market.
Couples will often opt for a joint tenant option, leaving it to them to decide how they wish to split the monthly payments, often taken from a single direct debit.
Friends or relatives may prefer to buy as tenants in common, allowing more flexibility on both financing and ownership arrangements.
What are the benefits of a joint mortgage?
For first time buyers the most obvious benefit of buying with someone else is the splitting of costs. Raising a deposit is one of the biggest hurdles faced by those trying to get on the property ladder and splitting the sum reduces the amount each buyer has to save.
Whether they are joint tenants and tenants in common, the monthly mortgage payments will be reduced compared to owning alone, meaning they may be able to buy a more expensive property.
For tenants in common agreements, the overall ownership between co-owners adds up to 100 per cent. This is different from joint tenants, where each co-owner owns 100 per cent of the whole property.
The breakdown for tenants in common agreements can be any variation. For example, says Mendes, Cristina could own 50 per cent, Dave could own 25 per cent and Ellie could own 25 per cent – or they could each own a third at 33.33 per cent.
What are the drawbacks of a joint mortgage?
Trust in your fellow homeowners is critical, as you are taking on the mortgage debt together. As a result, the drawback comes from the risk of another person being unable to keep up with payments.
Edward Checkley, managing director at mortgage adviser Advias said, ‘Keep in mind, all parties are responsible for the mortgage debt, and if one can’t meet obligations, the others must cover the full amount.’
If you decide you want to sell the property you need the agreement of all the owners to proceed. If they do not want to, the issue may end up in court. For one person to sell their share, they will need their co-owners to buy them out, or to find a buyer for their share only.
As a first-time buyer you are currently benefit from stamp duty tax relief. First time buyers paying £300,000 or less for a residential property will pay no Stamp Duty and those paying between £300,000 and £500,000 will pay 5 per cent on the amount of the purchase price over £300,000.
Those buying a property over £500,000 do not receive any relief.
However, if you are entering a joint mortgage with someone who is not a first-time buyer you will lose the tax relief and have to pay stamp duty at the full amounts.
What to do if you need a mortgage
Borrowers who need to find a mortgage because their current fixed rate deal is coming to an end, or because they have agreed a house purchase, should explore their options as soon as possible.
This is Money’s best mortgage rates calculator powered by L&C can show you deals that match your mortgage and property value
What if I need to remortgage?
Borrowers should compare rates and speak to a mortgage broker and be prepared to act to secure a rate.
Anyone with a fixed rate deal ending within the next six to nine months, should look into how much it would cost them to remortgage now – and consider locking into a new deal.
Most mortgage deals allow fees to be added the loan and they are then only charged when it is taken out. By doing this, borrowers can secure a rate without paying expensive arrangement fees.
What if I am buying a home?
Those with home purchases agreed should also aim to secure rates as soon as possible, so they know exactly what their monthly payments will be.
Home buyers should beware overstretching themselves and be prepared for the possibility that house prices may fall from their current high levels, due to higher mortgage rates limiting people’s borrowing ability.
How to compare mortgage costs
The best way to compare mortgage costs and find the right deal for you is to speak to a good broker.
You can use our best mortgage rates calculator to show deals matching your home value, mortgage size, term and fixed rate needs.
Be aware that rates can change quickly, however, and so the advice is that if you need a mortgage to compare rates and then speak to a broker as soon as possible, so they can help you find the right mortgage for you.
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