Buying a property with friends is becoming more and more common as house prices in the UK rise. However, there are many things to consider and it may not be for everyone, as it carries a high level of risk.
In this guide, we will explain all the things you need to think about before you take the plunge and join forces to get your foot on the property ladder.
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How to buy a house with friends?
Before you choose to purchase a property with some of your friends, here’s what you should do and what you need to take into account:
1. Be honest about finances
When buying with friends, it’s important to be honest about each other’s financial situations. Whether you plan to purchase with one pal or a group of you are combining funds to get onto the property ladder, it’s key to be open about:
- Your debt
- Your credit score
- Whether your income is likely to change in the near future
- Your individual finances could affect the amount you are able to borrow for a mortgage, and when you are all co-owners of a property, you will be linked financially.
2. Establish your budget and what you can afford
It’s always essential to create a budget when you’re buying a property – whether you’re a first-time buyer, an experienced homeowner, a couple, or friends investing together for the first time.
Ensure that each person is aware of how much deposit they are contributing to the purchase, and decide on the maximum price you can afford according to your combined income.
A great way to start is to use a mortgage calculator online, which will give you an idea of what you can potentially borrow from a loan provider.
Also, consider the expenses you’ll have to pay when owning a property together and whether you are capable of covering them.
3. Joint tenancy or tenants in common?
When buying a property with several people, it’s important to decide if you will own it as joint tenants or tenants in common. Up to four individuals can buy the property together, and both joint tenants and tenants in common have their own distinct advantages.
Joint tenants own an equal share of the property. If one of them dies, their share passes automatically to the other owners. Furthermore, if one of them wants to sell, all the other owners must agree.
Tenants in common, on the other hand, can own differing shares in the property. So, if one person wants to sell, they can do so freely and without the agreement of the other owners.
Additionally, if one person dies, they can leave their share of the property to a beneficiary instead of it passing to the other owners.
When buying with a friend, tenants in common gives you more protection over your share of the property. Moreover, tenants in common can also hold different shares in the property, so if one person paid more towards the deposit, they can own a larger share.
4. Get a mortgage with friends
Sharing a mortgage with friends is a big decision, so it’s important to make sure you’re prepared and aware of the commitment you’re making.
Two friends can get a mortgage together, but if there are more than two of you buying the property, the lender will usually consider the income of the two highest earners when assessing your borrowing potential.
However, they will still assess the finances of all of you, so one person’s credit history or debt level may affect what you can borrow.
When getting a mortgage with friends, you need to consider the type you want to take out. Your options include fixed rate, variable rate (including tracker), and discounted rate mortgages.
Plus, you’ll need to decide if you want a repayment mortgage, where you pay back capital and interest over time, or an interest-only mortgage.
Once you take out a mortgage with friends, you’ll all be responsible for paying it back. That means that if one person can’t make their payments, the rest of you will need to cover it.
5. Draw up a co-Living agreement
Ensuring that everyone is legally protected and understanding each other’s responsibilities when buying with friends is essential.
The best way to do this is by creating a cohabitation agreement or trust deed, which can be done by a solicitor. These agreements are legally binding and usually include:
- The share of the property each person will own,
- The deposit that each person is providing,
- How the property will be valued should one or all of the owners want to sell,
- What will happen if one of the owners passes away,
- How disputes between owners will be settled,
- How the property’s bills will be paid (and who will pay what),
- How maintenance costs will be covered,
- Whether rooms can be rented out and how potential tenants will be assessed.
6. Ensure each person has a will in place
If you and your friends are buying a property as tenants in common, it’s important that each of you has a will in place. This will determine what happens to your share of the property upon your death.
This could mean that you pass your share to a beneficiary, or that your co-owners can buy your share from your estate.
If someone dies without a will, their share of the property will be passed to their next of kin under the Rules of Intestacy.
7. Discuss how you’ll split the bills
When you own a property with friends, there are certain bills you’ll need to pay. This could include gas and electricity, council tax, water and sewerage, broadband, and TV or music subscriptions. If you own a flat, ground rent and service charges should also be taken into account.
It’s essential to make a plan for how the bills will be split and paid. Drawing up a cohabitation agreement is a great way to legally state the responsibilities for bills.
Keep in mind, though, that your individual credit history could be affected if your household fails to pay a bill on time, even if the responsibility lies solely with one of the co-owners.
8. Set up a joint account
When buying with friends, setting up a joint bank account can be a great way to pay your mortgage and monthly bills. Make sure everyone who needs access to the account has it and come to an agreement on how the account funds should be used.
You could all contribute a certain amount each month to cover the mortgage and bills, and add a bit extra to create a contingency fund for any property maintenance.
9. Draw up an inventory of possessions
If you purchase a home with your friends, it is essential to make a record of who owns what and to keep it up-to-date. This ensures that, should you decide to sell the property, there will be no disagreement over who holds which items.
Additionally, if you purchase items together and split the cost, make sure to include them in the inventory and have a plan for what happens to them in the event that one or all of you decide to sell.
Is it a good idea to buy a property with a friend?
Buying with a friend or multiple friends can be a great way to get a foot in the door for owning property, but it is important to make sure everyone involved is aware of the commitment they are making and have a legally binding agreement to protect each other.
Weighing the pros and cons of buying with friends is a must:
Pros of buying with a friend:
- Having increased borrowing power
- Starting to build equity together
- Living with someone who you trust and like
Cons of buying with a friend:
- Every buyer’s credit history is taken into consideration
- Disputes can arise if one person wants to sell
- Owning a property with a friend can put a strain on your relationship.
Can The Bank of Mum & Dad Help?
Buying a house with friends is an incredibly exciting experience and can help you get onto the property ladder faster.
You can earn up to £7,500 tax free using Rent a Room Scheme. Start by looking at demand for room rentals on Spare Room website.
If your parents are willing and can afford to help you, it might be worth seeing if they can gift you the money for the deposit. It is a sensitive conversation but worth having over a cup of tea.
Your parents may be thinking of downsizing due to their age or illness. They may be open to the possibility of giving you the inheritance now while they are still around to see you prosper.
We are a property-buying company, so we’d be interested in buying their home for cash should they need a quicker-than-normal sale.
Get in touch with us to see if we can help. Better still, get your Mum or Dad to speak to us directly.
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