What is a Joint Mortgage?fjpinvestment
It’s possible to obtain a larger mortgage if there is more than one person involved in taking out the loan. When it comes to a joint mortgage, whether a couple or a group coming together to buy property, there are several things that you need to know before you go ahead and buy jointly. Become aware of what your responsibilities are and what it means when something goes wrong.
What are joint mortgages?
A joint mortgage can be secured for more than one person, and everyone named on the mortgage will be responsible for making monthly mortgage payments. As long as someone’s name is on the mortgage, even if one of the mortgagees is not paying for the mortgage, the legal responsibility to pay for the mortgage is held jointly among the mortgage parties to the agreement. Those holding the mortgage jointly can decide for themselves how they will share the equity in the property, which is the percentage of the property that they own, and which is reflected by how much of the mortgage is paid off.
Eligibility for taking out a joint mortgage
Typically, it is couples that will take out joint mortgages, such as married couples or partners that constitute a civil partnership. There are other types of joint mortgages, however, such as mortgages held by friends or family members, or a business partnership formed for the purpose of investing in property, usually for the benefit of both capital appreciation and rental income.
Cohabiting, unmarried couples
Information complied by the Office of National Statistics shows that cohabiting unmarried couples are now the fastest growing family unit in the UK. Many of these cohabiting couples will seek to take out a joint mortgage before they get round to tying the knot, and some of these couples will opt to not get married at all down the line. Religious and social values are changing, and so is the view of how people wish to live their lives. What are the best options for unmarried, long-term partners looking for a joint mortgage?
Most unmarried couples will choose to become joint tenants, so that they can both have equal ownership of the property. One of the advantages of this type of mortgage arrangement is that if one of the parties should pass away, the other one will automatically inherit the property as the sole owner.
Some couples may find themselves in a situation where one party earns more than the other, and so there will be a difference in what they contribute toward the mortgage. Where this is the case, the higher-paying individual may want to secure and protect their higher payments in case of a breakdown in the relationship, which statistics also show holds a high possibility. In this situation, the couple could opt for tenants in common. A significant drawback with this set-up, however, is that if one of the parties passes away, the surviving party will not have an automatic right to inherit the property.
Joint mortgages with parents
Sometimes family members or friends may want to enter into a joint mortgage so that you can easily afford a better mortgage, or perhaps to buy an investment with you. In Chinese culture, purchasing property jointly as family members is very common and necessary in many cases, since property can be prohibitively expensive without it.
Depending on the lender’s policy on joint mortgages, some will agree to mortgages with up to four people coming together to buy a property. Having said this, the vast majority of joint mortgages are done by two people.
What are the borrowing limits for joint mortgages?
A combined income means that you are likely to be able to borrow more money than if you were going it alone. A regular income from both parties, or more if others are involved, means that you can afford a more expensive and larger property than if you were buying on your own.
Historically speaking, lenders would decide what borrowers could borrow by doing a simple calculation based on how much they earned and then multiplying it by a certain amount. An example to illustrate this is where borrower one earns £20,000 per year and borrower two earns £30,000, the combined earnings of which could mean a mortgage up to about £150,000 – three times the combined wages of the two borrowers.
These days, however, things have changed. Now, lenders will not only take into account the combined income but also the applicant’s credit score and what they typically spend each month on bills and other outgoings. In other words, the lender is not just interested in what people earn but also in how responsible they are with their money.
The price of joint mortgages
Joint mortgages cost the same as standard mortgages, and this includes any fees and interest rates. With joint mortgages, however, it is likely that a larger deposit could be saved up, resulting in a better mortgage deal being secured.
Securing a joint mortgage
The first step in securing a joint mortgage is establishing what your budget is and what your combined income is. There are plenty of online mortgage calculators that you can use to help with this.
A deposit will need to be paid, so you will have to be clear on what you have managed to jointly save up or whether you will need more time to build up the level of deposit you will need for the type and size of mortgage you are hoping to get.
If you are not first-time buyers but instead already have a mortgage on another property, you can use the equity to put towards the deposit on the new property.
For joint mortgages, there are various things that will have to be done together, which include making joint decisions, completing and signing the application form, meeting with and discussing your application with solicitors and the lender.
Joint ownership of the property
No matter what contributions are made by each respective party, each person named on the joint mortgage is equally responsible for ensuring that the monthly repayments are made. If one of the named joint owners has stopped paying their share, the remaining mortgage holders are responsible for making sure the full repayment is made.
Any future changes or modifications to the mortgage, such as transitioning over to a better rate mortgage, for example, will require a joint decision and agreement.
Two ways to jointly own property
- Joint tenants
- Tenants in common
Joint tenants imply that all mortgage borrowers will be treated as a single owner with equal rights to the property. This is typically the method chosen by long-term couples.
With this type of agreement, when one of the borrowers passes away, the remaining borrowers will automatically inherit their share of the property. Furthermore, if there was a break in the relationship and the property was sold as a result, then the profits would be shared equally. If the property was in negative equity, then the difference in equity would also be owed equally. Any remortgage would have to be done jointly.
Tenants in common
This may be the preferred choice for some couples that wish to secure their own contribution and share in a property since it allows for each party to separate their own shares. This mortgage type is typically used by friends, family, or business partners, but not long-term couples.
With recording share distribution in a deed of trust, the shares allocated to the property can be allocated at whatever percentage base the parties choose; an even split is not mandatory. The shares in the property can be sold separately and don’t require agreement from the other party members. Each property share holder may also leave their share to someone else in a will, and it will not automatically be inherited by the remaining parties.
You should be aware of how the joint mortgage can affect your credit rating report.If you try to borrow money in the future, lenders will perform credit checks on you to help them decide if they will lend to you.
Any person you have a financial association with, such as the other parties on your joint mortgage, will then be linked to you on your credit rating. If the joint mortgage owners end up with a bad credit rating, it will likely affect your standing with a potential lender. Furthermore, any missed or late payments that are flagged will also likely perturb lenders from lending to you in the future.
Exiting a joint mortgage
It is possible to exit a joint mortgage, but it can come with some complications. The two basic ways are if one person buys out the other, or alternatively, they could both sell the property and share the proceeds.
For tenants in common mortgages, selling one owner’s share to another party is possible. Where the other party is unable to afford to buy the other out, and where the lender feels confident that the buyer can afford higher repayments, it’s possible to extend their own mortgage or get a new one to cover the changes.
For joint tenants, however, an agreement on the mortgage is needed before the property can be sold. Alternatively, the mortgage arrangements can be changed so that you become tenants in common in order to sell a share of the property to another.