Buying with Friends VS The Bank of Mum and Dad
“Treat your family like friends and your friends like family”… Sounds ideal, but when it comes to buying property, like anything else, money can often cause problems. First time buyers are still at a disadvantage and are often left looking for help to buy their first home, whether that’s with the help of friends or family.
As many recent news articles would suggest, house prices have risen considerably over the last decade. It is generally well perceived that many young people find it very difficult, if not impossible, to get on the property ladder. With increasing house prices, strict lending criteria, and the ever increasing costs of living, many younger people are looking to co-buy with friends, but, is this the best idea?
The Idea of Co-Buying
It was recently reported in the news that there has indeed been an increase in people “co-buying” and in 2018 some mortgage lenders began rolling out a “mortgage for four” product to accommodate a growing trend in first time buyers seeking to take out a mortgage with two or more people, and in doing so helping to get a foot onto the property ladder, whilst assuming that each individual buyer’s investment would grow over time until they were able to sell on in the future and make their own way “up the ladder”.
The Mortgage Issue
Many mortgage brokers have detected a small increase in applications by groups of three or four buyers buying together, but it was never entirely clear whether this was a case of groups of individual friends or couples buying together, or whether the applicants were actually buying with their parents (the good old “Bank of Mum and Dad”).
That said, not all mortgage lenders offer group mortgages to assist first time buyers wishing to purchase a property through this method. Nationwide Building Society, for example (at the time of writing), currently has a maximum of two people per mortgage.
Furthermore, and probably the likely reason most mortgage lenders take a dim view of the idea of offering a “mortgage for four” is quite simply the fact that, if they need four applicants to meet lending criteria, the greater the risk that if one of the multiple borrowers were to simply stop paying contributions towards the mortgage, or indeed the maintenance of the property, or other associated costs and outgoings, the others would not be able to make up the deficit that the mortgage would require.
Best Friends Forever
Even if a willing mortgage lender could be found, there are inevitable risks in individuals clubbing together to buy as a group. Cohabiting with anyone can always lead to friction, fallings-out, arguments and disagreements. But if things deteriorated so badly that one owner wished to move on, co-ownership with other people makes this difficult. Wherever one owner in the future wished to sell up and move on, their co-owners would either have to buy them out or, if they simply couldn’t afford to do that, be faced with the prospect of selling the property when not every owner may be willing to do so.
There are certain steps to formalise and protect co-owners’ obligations towards each other, as well as their individual rights and available investments. For example, co-owners can enter into a Declaration of Trust, which is an agreement between co-owners which specifies how a property is held between its joint owners – for example, what responsibilities and obligations they are bound by to each other, the shares in which the property is held, the division of proceeds upon sale, and rights of occupation.
Turning to Mum and Dad
Whilst the concept of buying with friends may be a growing trend, until mortgage lenders are more willing to assist and offer products which allow buyers to purchase properties through this means, it seems many first time buyers are still left to struggle with finding the means and resources to gain a step on the property ladder. Indeed, many first time buyers are reliant on inheritance, or assistance from family through gifted funds, in order to build up enough of a deposit to purchase their first property. Therefore the “Bank of Mum and Dad” continues to be a common means through which first time buyers are able to proceed.
However, where parents provide gifted funds to be used as a deposit and their child is also obtaining mortgage finance this creates a complication many people would not appreciate. As funds are being gifted by a third party, this raises various additional legal issues which need to be addressed before the transaction can proceed.
Another Mortgage Issue
The fact that the balance of funds is being provided by a third party must be reported to the mortgage lender by their solicitors, unless the lender’s mortgage offer records the fact that the lender is already aware of this arrangement and is happy to proceed on this basis.
There could also be adverse implications if the parents are made bankrupt soon after the gift has been made. This needs to be considered so that steps can be taken to minimise any potential risk to the buyer and the mortgage lender.
Using the “Bank of Mum and Dad”, therefore, may always seem like a very attractive way of helping a child get onto the property ladder. However, this should always be considered very carefully before deciding to proceed in this way because in practice this will always involve far more legal work then many would expect and inevitably results in additional costs. Particularly as many mortgage lenders fail to notify their solicitors that they are already of and happy to proceed by way of a gifted deposit, even though the borrower will have likely been required to disclose this information when applying for their mortgage.
What We Do
At Bennett Griffin LLP, we are always happy to help prospective purchasers move forward through this process.
Our Private Client Team are ready and able to advise on and draft agreements such as Declarations of Trust to assist co-owners in establishing a legal agreement which helps protect and secure each owner’s rights and investments.
Our Residential Property Team has extensive experience at advising first time buyers through the minefield of gifted deposit issues, as well as liaising with mortgage lenders where necessary, and ensuring the appropriate measures are put in place to protect both buyers and their mortgage lenders.
Our matrimonial team can also help with co-habitation agreements.
Should you have any questions about gifted deposits, or indeed joint ownership of buying properties with friends or family, please do not hesitate to contact us.