Group House Purchases using Shared Home Loans
With more and more people struggling to get on the property ladder as individuals, there is a growing trend of taking out shared home loans amongst groups of people. The article discusses the complexities of doing this and also the legal side of ensuring a smooth transaction and on-going shared ownership.
As a consequence of sky-high property prices, more and more people are clubbing together to take out shared mortgages. This article discusses the different types of Group Home Loans offered by the mortgage lenders, the legal side of doing it and looks at some of the problems of group ownership.
The Growing Trend of Shared Home Loans
With the rise in house prices and people struggling to individually get on the property ladder more and more people are willing to shelve their differences and take the risk of sharing their living space and taking a shared home loan. Lenders report that around 2-3% of all mortgages are now being taken out under shared ownership and predict the numbers to rise fast. One mortgage lender reported a 50% rise in shared home loans over the last twelve months and others have reported very strong growth.
The main rises in this area are coming in the South East and in major cities where first time buyers are being priced out of the market. But by taking a group mortgage, potential homeowners can typically borrow more than they could by going it alone or with a partner and can therefore secured a property that would otherwise have been out of their reach.
Group mortgages are not a new concept or standalone separate products to mainstream mortgages. Typically mortgage lenders offer their standard loan deals and rates to groups of borrowers. So the loan packages include the standard fixed rate, variable rate and tracker mortgages. But the amount borrowers will be able to borrow varies from lender to lender as different loan providers adopt different lending criteria. With the growing trend in this type of mortgage one change in recent times is that more lenders are willing to consider four individual salaries, whereas before they would only take two.
Shared mortgages are typically being taken out by people in the twenty to thirty five age groups and are normally by groups of graduates or young professionals who may already have rented a property together. Most people consider it as a last option when they have failed to raise a deposit themselves from parental help or from savings. However the changes in lifestyles like delaying marriage or starting a family is also contributing to the growth in shared home loans.
Mortgage experts see this type of lending as higher risk than standard loans. For example, relationships between people taking group mortgages can be more remote than a standard mortgage, which would typically be taken out by couples or spouses. Therefore lenders sometimes ensure that if one person on the mortgage were to move on, the remaining borrowers could still afford to take on the remaining stake and service the higher loan repayments.
Lenders are therefore usually more conservative when they come to assessing the lending criteria. Some score each borrower individually according to their salary and outgoings and then aggregate it. Others will lend up to three times each of up to four salaries, whereas others will lend twice the two highest salaries in the group and one times the income of the remainder of the group.
One of the key things about taking on a shared home loan is that each individual in the group can be held fully responsible by the lender for the entire loan if their fellow borrowers do not keep up with repayments.
Making it Legal
Taking out a group mortgage requires considerably more planning and organisation than a standard mortgage. To avoid problems from potential relationship breakdowns further down the line, it is worth getting as much detail written into a legal document as possible before you complete on the property.
The best way to do this is through a declaration of trust. This defines the legal terms for joint ownership of the property and sets out your reasons for buying the property. The crucial point to bear in mind is that with group home loans the holders are "jointly and severally" liable for repaying the loan. This means that if someone defaults on their payment the lender can chase the other borrowers to cover their share.
The key starting points in considering a group mortgage is deciding what share of the property each person will own and what proportion of the mortgage they will be responsible for. This can depend on the level of deposit they are contributing, and how much each is effectively borrowing.
Another big issue is what happens if someone decides they want to get out of the home loan contract. It is quite common to offer a first refusal clause in the contract, which offers the other homeowners the options of buying out the person who wants to move on. If this eventuality arises then you can get valuations from two or three estate agents to work out what their share is worth, but you might want to insist on a formal independent valuation in the event you can't agree.
If the remaining homeowners can't afford to take on the increased loan repayments, then the property would usually be put on the market. There is no real market for selling only a proportion of any property. However, there are circumstances where you can get a court order to defer any sale of the property.
For example, if all parties have agreed to stay in the property for two years and someone decides after six months they want to move on the parties that remain could gain a court order to delay a sale or to force the person leaving to cover any fees incurred by re-mortgaging.
The declaration of trust can also lay out how to split outgoings such as maintenance costs and bills and list who owns what in the property. The maximum number of people that can be registered on the title deeds of a property is four.
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ABOUT THE AUTHOR
Adrian Hudson originally started in I.T Management, but after recognising a niche for a company with a finance and I.T mix, in 1997 he formed his own successful consultancy business. He is currently spending most of his time working on the contracts and business fundamentals for the secured loans business We Introduce You.