What is a Joint Mortgage?
A joint mortgage is a loan than is shared between multiple people. Most lenders allow up to four people to be included on the loan. Each of these people are liable for making payments. If one person misses a payment there can be financial and legal consequences for each of the involved parties.
In many cases, a joint mortgage is taken out by a couple purchasing a house. This can also apply to a number of friends or family members who wish to purchase a property together. The later occurs more frequently when parents agree to sharing a mortgage with their child.
When applying for a joint mortgage, you should be certain that you have complete trust in the other individuals. What may seem like a good idea at first can have long lasting implications if it doesn’t go well.
When deciding whether to take up a joint mortgage you need to consider a number of factors. There are both benefits and limitations to co-borrowing and you should be aware of all the associated risks.
Who can get a Joint Mortgage?
There are no exclusions on the type of person(s) that can be included in a joint mortgage. It could be a partner or spouse, friends, business partners and family members.
As would occur with a mortgage by yourself, if any individual has a history of bad credit, the application can be rejected. This may also occur if any member of the application will reach the maximum age limit by the end of the mortgage term. This may be something to consider for parents looking to start a mortgage with their child.
Advantages of Joint Mortgages
- Opportunity for better rates
With additional co-borrowers you may be able to save a larger amount to contribute as a deposit. The more you can put down on a property, the better rates you will receive from the lender. This typically occurs for every additional 5% of the value of the property that you are able to provide as deposit.
A 70% loan to value mortgage will have far better rates than an 80% LTV mortgage.
- Larger Loan
When applying for mortgages, all parties’ financial credentials and income are considered when deciding upon the amount you can borrow. Whilst evaluating mortgage amounts for up to 4 co-borrowers, many lenders tend to look at the two highest earning individuals.
Most lenders, as a rule of thumb, typically provide loans that are up to 4.5x your annual income. With more than one individual, this is combined to increase the amount available to borrow. By yourself, if you were to take up a mortgage with an income of £30,000, you would likely get access to a £135,000 loan. If you have an additional income of £30,000, this increases the amount you can borrow to £270,000.
- Shared Responsibility
Depending on the people you are borrowing with, holding a joint mortgage can hold more security than a sole mortgage. Each individual does have a stake of responsibility. If any individual misses their payment, there will be implications for all borrowers.
This shared responsibility may encourage the group to band together to ensure payments are made on time and each member can provide their share.
For parents borrowing with their children, they may be able to provide some financial security if the children begin to struggle to make payments. Partners or spouses may also create a similar agreement and offer unconditional financial support.
Before committing to a joint mortgage, ensure all parties are able to cover their share of the payments consistently. You should be aware of the risks associated if one member has unstable finances or cannot be relied upon.
Disadvantages of Joint Mortgages
- Potentially Worse Rates
We previously discussed how a joint mortgage could help you get better rates on your mortgage loan. However, this is based on the lenders assessment of your credit checks and financial history. If you choose to borrow with somebody with a significantly poor financial history, you may be subject to worse deals than borrowing by yourself. In the worst-case scenario, your mortgage application could also be rejected.
- Risks to your future credit rating
When commencing a joint mortgage with an individual with bad credit, beware of your future credit ratings. Each individual should of course be responsible for their share of the payment. However, if one borrower does not pay, the others are also liable for this missed payment. This creates a record on your credit rating, no matter who missed the payment or how delayed it was.
You should also consider whether any individual has bad credit before beginning the mortgage application. Even if all other borrowers have great credit scores, the bad scores tend to have more focus by lenders. If there are issues with late payments, defaults and county court judgements, these can seriously influence the outcome of your application. You may need to provide more details to the lender regarding your situation and the finances of other borrowers to ensure the approval of the mortgage.
- Ownership confusion
A Joint Mortgage doesn’t automatically assume joint ownership of the property. A joint mortgage details the individuals who are responsible for the payment of the loan. In some cases, those paying the loan may not be on the title deed or deed to the property.
Mortgage lenders will typically want the mortgage to be in the name of all adults living within the property. But this doesn’t apply the other way around, you can live outside of the property, pay towards the mortgage and not have a share in the property.
This can occur in cases where parents are on a joint mortgage with a child who owns the house. In this case a Joint Borrower Sole Proprietor mortgage is implemented. This accounts for multiple people paying for the mortgage whilst a lone applicant owns the property and is names on the deeds.
If you will be paying for the mortgage on a property and residing within it, you likely want a share of the property’s ownership. The details of this arrangement are agreed in the contracts for the exchange of the property. Discussing these details should have likely occurred with a conveyancing solicitor.
Joint Tenants or Tenants in Common
Joint Tenants is a term used when a property is owned by more than one person. Each individual has an equal share of the property. In the eyes of the law, they must act as one in regards to their property.
This means they have equal obligation to the property. Joint tenants also have the legal right to stay in their home unless ordered otherwise.
In the case that one of the joint owners passes away, the share of the property cannot be left to a beneficiary, it is transferred to the other joint tenants. In the case that one of the tenants wants to sell the property or take out a loan against its value, all owners have to provide consent. This stands unless ordered otherwise by a court.
If one of the joint tenants wants to exit the agreement, there are a number of ways for this to happen. Forcing the sale of the property can be one of the methods to get out of a joint mortgage.
Tenants in Common has a slightly different meaning. Up to four people can be tenants in common within a property. Unlike Joint Tenants, each individual can have a different share of the property. This typically occurs when friends or relatives purchase a property together, whereas a couple may be Joint Tenants.
Despite having different shares in the property, each individual still has combined responsibility for the joint mortgage. If one person cannot make a payment, the other tenants in common are liable for this payment, no matter what their share of the property is.
When taking out a Joint Mortgage as Tenants in Common, it is wise to seek legal advice before applying. A declaration of trust can be drawn up by solicitors detailing the obligations held by each individual. This can include how the property will be sold, how much notice is needed and how sales profits should be divided.
Tenants in Common do hold more flexibility in their ability to leave the joint mortgage. They can sell their share of the property to the remaining tenants in common. When one of the co-borrowers passes away, their share of the property can be passed onto designated beneficiaries.
How to Leave a Joint Mortgage Agreement
There may come a point where you decide to severe the financial commitment with the borrowers made in your Joint Mortgage. This may come due to a disagreement, a dissolved marriage or simply wanting to go separate ways with the other borrowers. There are some simple options as well as some more complex options to make your way out of a joint mortgage.
- Sell the Property
Potentially the simplest way to exit the Joint Mortgage is to sell the property and use the funds to pay off the remaining portion of the mortgage. This could incur additional costs if you have not yet completed your first term, however this depends on individual circumstances. You may also find yourself in the situation that your property is in negative equity. This occurs when the outstanding amount on the mortgage is higher than the current value of the property. This may leave you looking for an alternative way out of the mortgage.
- Buy out the other tenant
Whoever wishes to remain at the property can choose to buy out the other individual. This would require offering their share of the property in a cash payment. This can be more complex as most homeowners don’t always have the funds available to provide a portion of the value of the house. Re-mortgaging may be an option if enough payments have been made to cover the relevant equity. However, they would need to ensure they can manage the full mortgage payments by themselves.
- Retain a stake in the property
Although you would not be out of the Joint Mortgage, retaining a stake within the property can be an affordable method for both parties involved in the separation. The remaining borrower can continue to make mortgage payments for both parties whilst the individual wishing to exit the agreement holds a stake in the property for their amount of contribution. Once the remaining tenant wishes to sell, this stake would be paid.
Joint Mortgages are evidently complex agreements that require extensive consideration before entering into a legally binding contract. When applying for a mortgage, most individuals don’t consider the relationship going sour. However, you may want to consider the worst-case outcome, should this ever happen. You need to be confident that you will be able to cope financially should payments be missed or one party wants to leave.
In most cases, agreements are made based on trust. This may be between spouses or partners as well as parents and children or friends. If you are confident in the relationship and financial status of the other borrowers, joint mortgages can offer better mortgage rates with higher loan amounts that allow you to make your way onto the property ladder.