Purchasing a residential house is a significant milestone in anyone’s life, often symbolising financial stability and personal achievement. However, the soaring property prices in recent years have made this dream a bit more challenging to attain. Mortgage affordability criteria is getting stricter and lenders are increasingly requiring larger and larger deposit contributions from buyers. Meaning that people are struggling to get the level of mortgage that they perhaps would have several years ago, and are having to save more and more money, delaying the purchase process by years.
As a result, many individuals are exploring different creative ways to make homeownership a reality, including partnering with friends or family members to buy a house together. For example, two best friends could buy a home to live in together, or siblings could decide that they want to buy a home for them both to share. While this arrangement can offer various benefits, it also comes with potential pitfalls that should be carefully considered with the help and guidance of a qualified professional mortgage advisor. In this blog, we at Oportfolio mortgages will delve into the advantages and potential drawbacks of purchasing a residential house with a friend or family member, with a focus on mortgage affordability issues particularly.
The Benefits of Buying Property With Friends or Family
- Increased Affordability: One of the primary motivations behind purchasing a house with a friend or family member is the increased affordability it provides. By pooling financial resources together, buyers can potentially qualify for a larger mortgage and gain access to a more desirable property that might have been out of reach otherwise. For example, a sole borrower on £40,000 a year could borrow around £179,000 with most lenders (subject to criteria). A flat in London could set you back a minimum of £300,000 with many reaching much higher prices. That would mean that the sole borrower would have to fork out £121,000 deposit, just to be able to afford the flat. However, if that sole buyer decided that they would like to buy a 2-bedroom flat with their brother or sister, who earned an additional £40,000 a year, their maximum mortgage affordability could go up to £359,000.
- Shared Financial Responsibilities: When buying a house together, the burden of mortgage payments, property bills, and maintenance costs is shared. In a cost of living crisis, this is a very hot topic. Thousands of single homeowners or even single renters are reporting that they are struggling to keep up with day-to-day running of their property. Buying with a friend or family member can significantly alleviate the financial strain on individual buyers, making homeownership more sustainable.
- Potentially Easier Qualification: When applying for a mortgage, lenders will consider the combined income and credit scores of co-buyers, potentially making it easier to qualify for a mortgage with favourable terms. This can be especially beneficial for first-time homebuyers or those with limited credit history. For example, if you are purchasing a property but are struggling to meet the minimum credit score that the lender has due to not really having had any credit in the past, your co-buyer could boost your application if they have a particularly good score. This is not always the case for people with credit issues however. You should always consult a mortgage advisor if you feel this is the issue.
- Emotional Support (In It Together!): Purchasing a property is one of the most stressful things that you can do in your adult life. There is no question about that. A mortgage broker’s job is to try and help you to elevate that stress, but sometimes there are unavoidable things that crop up during the purchasing process that can really take a toll on you emotionally. However, by purchasing with a friend or a family member, you can get the emotional support you need and that you might not have received buying on your own. Also the emotional support that comes from sharing a living space with a trusted friend or family member can enhance the overall homeownership experience. For people who prefer the company of others, it can provide a sense of companionship, especially for people who may be living alone otherwise.
The Downfalls and Considerations of Buying Property With Friends or Family
- Conflict Potential: Even the strongest relationships can be strained when financial matters are involved. Disagreements about mortgage payments, property maintenance, and other expenses can lead to conflicts that might damage the relationship. It is important to thoroughly consider whether moving in with this person and taking on a large financial debt with them is the right move for your relationship. Friends can fall out and family members can have disputes. The last thing that you want is to ruin a relationship by making bad financial decisions together.
- Financial Risk: If one co-buyer experiences financial difficulties or defaults on their obligations, unfortunately the mortgage and the property is still your responsibility and the other party could be held responsible for covering the entire mortgage payment. For example, if you secure a mortgage that is £2,500 a month that you comfortably split between you at £1,250 each, but the other co-owner loses their job…you would be liable to cover the entire £2,500 yourself if they can’t. Not to mention the household bills and any other associated fees commitment that comes with the property. This financial risk should be thoroughly discussed and planned for in advance with your mortgage broker.
- Exit Strategy: Life is unpredictable, and circumstances can change. Having a well defined exit strategy in place, detailing how the property will be handled if one party wants to sell or move out, is crucial to avoiding future disputes. If one of you meets a partner and decides they want to move in together or changes jobs and has to move out of the area, or simply decides that they are ready to move on their own, you will need to have a plan in place. Your mortgage broker can discuss things with you such as transferring equity or remortgaging in to sole name, or if you decide that you want to sell the property, your broker will be able to help you with any early repayment fees associated with the mortgage.
- Mortgage Affordability: While sharing costs can make homeownership more affordable, it’s essential to ensure that both co-buyers are financially stable and capable of contributing to mortgage payments. Lenders will assess both parties’ financial situations before granting the loan. For example, if you earn £50,000 a year but your co-buyer earns £7,000 a year, it is very unlikely that they will be able to keep up with the mortgage payments if anything happened to you or your income. This could lead to a mortgage application rejection, so that is why it is always important for your mortgage broker to do their research and weigh up your affordability options prior to application.
- Legal Considerations: Purchasing a property with someone involves lots of legal complexities. Drafting a legally binding agreement outlining ownership percentages, responsibilities, and dispute resolution methods is advisable to prevent future legal issues.
- Impact on Personal Finances: Co-buying a property can affect both parties’ credit scores and financial profiles. This can impact their ability to make other financial moves, such as obtaining personal loans or additional mortgages. Being financially linked to somebody is a big commitment in itself and if an issue arises, it can impact both parties, despite it only relating directly to one of you. Things like defaults, CCJs and Bankruptcies are all serious issues that you should consider before buying with a friend or family member.
Purchasing With Someone Else With the Help of a Mortgage Advisor
Buying a residential house with a friend or family member can offer a potential solution to the challenges posed by rising property prices. The benefits of increased affordability, shared responsibilities, and emotional support can be highly appealing. However, it’s essential to recognise the potential downfalls and carefully consider the impact on personal relationships and financial stability.
Open communication, well defined agreements, and thorough financial planning are key to ensuring a successful joint homeownership venture. Before embarking on this journey, potential co-buyers should conduct a comprehensive assessment of their financial situations, discuss their long-term goals with a mortgage professional, and seek legal advice. Ultimately, while purchasing a house with a friend or family member can be a viable option, it’s a decision that should be made after careful consideration of the potential benefits and drawbacks. By weighing the pros and cons and taking proactive steps to address challenges, co-buyers can navigate the complexities of joint homeownership and turn their home ownership dream into a reality.
If you or anyone you know is thinking of buying a residential home (home to live in) with a friend or family member, then please feel free to give our team a call or send us an email to see how we can help.