Whilst not all high street banks will consider Group mortgages, there are some mortgage lenders willing to consider them for groups of between two and four people. A specialist mortgage broker can offer advice on criteria and rates.

When it comes to getting on the property ladder, today’s borrowers are having to become more and more ingenious in their approach. The average house price is now nearly £196,000, more than seven times the average salary. Very few people are prepared to borrow that amount; therefore, single buyers are often left out in the cold when they want to get a foothold on the property ladder.

In an attempt to offer a broader range of people the opportunity to take out mortgages with them, lenders are starting to offer new ways of enticing more borrowers to become their customers. One of the latest options includes allowing groups of friends to buy a property together, thus pooling their resources to enable them to purchase their dream first home.

Group Mortgages - The Basics

Group mortgages are being offered by many high street banks and are available for groups of between two and four people. The amount that can be borrowed is based on the incomes of the individuals within the group and the property is then owned in equal proportions. For example, a group of four people would each own 25% of the property.

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Group Mortgage Benefits

One of the clear advantages of this type of mortgage and purchasing process is that it enables people to purchase properties that they would not otherwise be able to afford on their own. Of course, this might require the purchase of a bigger property which would reduce the benefits of a group mortgage.

For example, a one bed flat in a suburb of London would be available for £250,000, whereas a two bedroom flat would cost approximately £340,000. Therefore, the saving by purchasing together would not be £125,000 but instead would be £80,000 (i.e. £340,000 divided by 2 minus £250,000). In fact, in terms of price per square foot per person, the individual buyer might not be much better off, as they would have to share communal areas such as kitchen, living room and bathrooms.

The real benefit from this arrangement is that, whilst the individual may have less living space in a jointly owned two bedroom flat than they would if they were living on their own in a one bedroom flat, they are now on the property ladder. Saving up for a deposit is becoming increasingly difficult as rising housing costs push rents upwards. Therefore, individuals are finding themselves in a position of renting and trying to save a deposit; meanwhile, house prices are continuing to rise and the amount of deposit that needs to be saved is escalating.

Gain From Property Market Increase

By getting on the property ladder, even with a part share, it negates this problem and means that the individual is gaining from any property market increase. Taking the same property as we previously considered at £340,000: if property prices rise by approximately 10% in the year, at the end of the year the property will be worth £374,000. At that point, if they sold the property, each individual would walk away with a profit of £17,000. Of course, this relies on property prices rising, which is by no means guaranteed in the current financial climate.

Looking deeper into these figures, assuming that the two individuals put in a 10% deposit, each individual would have put in a deposit of £17,000 and taken a mortgage of £153,000. At the end of the first year, if the property were sold for £374,000, the share would be £187,000. After paying back the mortgage of £153,000, this would result in cash remaining of £34,000. This would amply allow the individual to go on and put down a deposit on their own one bedroom property.

Another advantage is that by going for a larger mortgage, even as a collective group, it often opens up other options in terms of mortgages available. Essentially, the larger the amount being borrowed, the more options are generally available, in terms of rates and lenders.

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Obtaining a Group Mortgage

Having found the suitable potential house mates with whom you intend to buy, one of the next steps is to look into the types of mortgages available to groups of people looking to purchase a property together.

There is a legal limit of four people who are able to be entered onto a property deed. Therefore, it is not currently possible to obtain a group mortgage for more than four people. Bear in mind that, when you are calculating the number of people, a married couple is considered as two people.

As a general rule, couples looking to purchase a property will normally be offered approximately 2.75 times their combined salary. This is because mortgage lenders view a couple as having pooled resources and couples, therefore, are commonly viewed as one entity. Groups are treated slightly differently, with individual income and expenses looked at to calculate the amount that each individual would be able to borrow. When these figures are added together, that total is the maximum that can be borrowed. An alternative way of calculating the total amount that can be borrowed is to take the highest salary and multiply it by four, before adding the other individual incomes. This latter way of calculating the amount that can be borrowed will often lead to a much higher total amount of borrowing and this, although useful, should be borne in mind when it comes to considering the repayments.

Many high street lenders are now offering group mortgages. Although specific group mortgages are not widely offered, the standard mortgages offered by banks and building societies will often be available to more than two lenders. It is well worth asking your bank or any other lender that you feel is offering particularly good financial deals whether they allow multiple buyers to take out one of their standard mortgages.

Bear in mind that the application process is likely to be more protracted than with a standard mortgage as there will be the need to gather a lot more paperwork, in terms of references and financial statements. Most lenders will also insist on meeting in person with each of the borrowers, due to the need to make money laundering checks. These checks require lenders to ensure that they know their customer and are comfortable that the identity of the customer matches the paperwork.

Group Mortgage Repayment Issues

Repayment issues are absolutely fundamental, when it comes to a group mortgage. In almost all cases of group mortgages, the lender will insist that all borrowers are considered jointly and severally liable for the repayments.

In legal terms, this means that if one person defaults on the mortgage, the lender will require that the other borrowers make up the difference in the amount due. For example, if the total repayments are £1,000 per month between four people, this would be £250 each; in the event that one person defaults, the remaining £250 would have to be paid between the other three members.

It is possible, and indeed advisable, that a legal contract is entered into between the group borrowers to deal with this situation. Whilst this type of legal contract will normally allow those who have to make up the difference to sue the defaulting party for any costs that they incur, this does little to assist with the immediate issue, particularly if the mortgage payments stretch each individual.

Another possible repayment issue is that, if the mortgage falls into arrears due to the non-payment by one of the borrowers, all individual borrowers will potentially find themselves with a bad payment record. This may seem unjust that one borrower could negatively affect the credit record of the other borrowers, despite the other borrowers maintaining all of their payments.

In the event that one borrower finds themselves in financial difficulty, most lenders will allow them to rent their room, or to transfer their part of the mortgage and to change the names on the deed. Both of these actions will normally have to be accepted by the lender.

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Tips for Success with Group Mortgages

Group mortgages really are an ideal way to get on the property ladder and to begin to build equity from the rising house price's situation. However, it is also very easy to see how these arrangements can potentially go sour, so safeguards should be taken to ensure that the major pitfalls are avoided.

Firstly, try renting as a group, before you buy. The purchasing process from start to finish will normally take at least six months, so why not locate a temporary rental property from which to conduct your search. This will serve several purposes; it will allow you to go through the house choosing process as a group. If you are unable to locate a property that you all agree on, this is indicative that purchasing a property together may not be such a good idea! Also, it will allow you all to see if you can live in harmony together. Finally, it will make the administration of the purchasing process a lot easier if you are all under one roof and able to sign documents at the same time.

Having a legally binding agreement, as well as the mortgage deed is imperative. A deed of trust is vital to ensure that the property passes in the correct way if something happens to one of the other owners. Similarly, it is important to make sure that you, as a group, hold the property in the correct way. There are two options: joint tenancy or a tenancy in common. With a joint tenancy, which is the most common option for husband and wife couples, the group own the whole. This means that, if one person dies, the property then passes to the remaining individual, outside of any will that may exist. For an unrelated group, a tenancy in common may be more suitable as this allows each individual to own a defined share of the whole. For example, if there are four owners all putting in equally, this will amount to owning 25% each. If one of the members of the group dies, their share of 25% will pass in line with the rest of their estate and not to the three survivors.

As well as the legal issues, it is also important to deal with practical matters such as what will happen if one person wants or needs to move on Will there be any house rules such as how many visitors will be allowed; are there any agreements as to how often maintenance tasks such as cleaning the gutters will be organised. How often will windows be replaced, are there any renovations or improvements that you will undertake and, if so, will there be a cap on any of the costs that are ploughed into these renovations.

Group Mortgage Summary

Entering into a group mortgage is one of the most popular ways to allow groups of friends to get onto the property ladder. By pooling deposits and pooling the repayments, you will be able to afford properties that would otherwise be beyond your reach.

However, there are some very serious considerations that have to be taken on board, before entering into a formal legal agreement. Make sure that everyone’s expectations and abilities to make repayments are the same and that there is a plan to deal with unexpected events.

Always obtain legal advice and make sure that you cover all of the bases and possible events. In doing so, you could be one step closer to getting on that elusive property ladder!

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