Escalating house prices mean that many first-time buyers cannot afford to go it alone. So why not buy with a little help from your friends, asks Christina Jordan of Your Mortgage magazine.
Although first-time buyers are coming back to the housing market, they are still few in number. Unless you earn a small fortune or have wealthy parents, you will find it difficult to get a mortgage on a single salary, which means you don’t get to own a property and therefore do not benefit from the increases in equity that many existing home owners can afford to smile smugly about.
So if you’re a first-time buyer, you need to look at your options. You could live on bread and water and save every spare penny you have to amass a bigger deposit, but with prices still continuing to rise, however slowly, the goalposts are continually moving while you are not.
You could take out a 100 per cent mortgage, where you don’t need a deposit; but then you’ll be borrowing more and probably paying a higher rate to do so – the best rates are available to those with a ten per cent deposit or more.
Or you could stretch your finances. Some mortgage lenders will lend you four or even five times your income – but only if you have a significant deposit and a particular kind of job. And this can be risky as borrowing to the limit gives you no leeway when interest rates rise or your income drops.
I want to hold your hand
If your salary is not big enough to enable you to buy your first property alone, you could consider buying with a partner or friends. Many couples buy their first home together and the lender will take into account both incomes.
Traditionally, you can borrow two-and-a-half times joint incomes or three times the biggest income plus one times the smaller income, though many lenders now offer more.
Most mortgage lenders will let you buy with up to three other people, but many will only take into account the two highest incomes. Joe Wiggins, spokesperson for Nationwide, explains: ‘We will take up to four people buying together, but we only take into account the highest two salaries when we look at how much you can borrow. Otherwise, four people might be able to borrow a huge amount. We use affordability rather than income multiples, which is a slightly more sophisticated way of calculating how much we lend, as we take into account outgoings as well as income.
‘It’s difficult for first-time buyers to get onto the housing ladder, with the average house price in the UK now reaching over £130,000, so joining up with friends can definitely be a practical option for some.’
But before you dive into buying with friends, you need to be aware of the potential pitfalls.
We can work it out
The most important thing to remember is that you may be best friends at the moment but nobody can predict the future. One person may, and probably will, decide to go his or her own way at some point, perhaps to set up home with a partner. Or one of the group could become unemployed. It’s essential that you know exactly what will happen when one person decides to leave or can no longer afford to pay.
Each borrower is responsible for the whole mortgage, not just their bit, so if three people bought together and one left the other two would be responsible for the whole thing.
It is important to seek legal advice before buying together; get a document drawn up, usually a trust deed, covering all potential situations. And you need to decide whether to buy as joint tenants or tenants in common.
A service has recently been launched for first-time buyers who want to get onto the housing ladder by buying with others. FirstRungNow offers a Joint Ownership Service that gives advice to groups buying together and helps individuals find potential property partners to invest with. Managing director Helen Adams explains the benefits of the service. ‘You can come to the website, FirstRungNow.com, for information and advice about joint ownership, such as legal and insurance requirements. And if you’re looking for someone to boost group numbers, or to find someone else with whom to buy, you can contact other people wanting to buy in the same town – you read profiles and choose who you want to get to know by email.’
Buying together could provide a valuable stepping-stone onto the housing ladder if your income won't stretch to buying your first home alone, but make sure you fully understand what you are getting into, choose people you know well and always get a legal document drawn up setting out what will happen if someone wants to sell their share. While money can't buy you love, if you go into the process with your eyes open, buying with a little help from your friends could turn out to be a great move.
yourmortgage.co.uk