Would-be homeowners who can't afford to go it alone have been given hope by deals that let them apply jointly with friends
Banks and building societies are being urged by the government to help friends and relatives club together to buy their first home.
Housing minister Grant Shapps this week called for more lenders to offer "mates mortgages", so younger first-time buyers who are struggling to raise a big enough deposit can team up with others and take their first step on the property ladder.
He took the opportunity to plug one product that already exists: Britannia's "Share to Buy" mortgage, which allows up to four people to buy together and takes everyone's incomes into account.
Shapps's call came on the day that official figures showed that the number of people renting privately owned accommodation in England has risen from 2.15 million to 3.35 million in just six years ? proof, if it were needed, that large numbers of would-be first-time buyers have had to shelve or abandon their dreams of home ownership.
The government reckons that for groups of friends without access to "the Bank of Mum and Dad", this sort of joint-ownership mortgage deal could become a mainstream alternative to years of saving, and also provide a boost to the housing market.
"Mates mortgages are one option I would like to see explored," says Shapps. "If there are mates who are perfectly capable of paying monthly mortgage payments but are struggling to fund a deposit on their own there should be straightforward options."
However, many experts say this is an area where people need to tread carefully as there are a number of pitfalls.
At present, the lending options are limited. The Share to Buy deal from Britannia, now part of Co-operative Financial Services, is a fee-free mortgage that allows borrowing of up to 90% of a property's value (new-build flats are excluded). The minimum number of applicants is two and the maximum is four. They can be friends, married or unmarried couples or family members, and they must all live in the property.
Brothers Nick and Jon Tandy decided to sign up with Share to Buy after being turned down for a home loan by HSBC. They had both been renting for a couple of years and worked out that for the money they were shelling out they could, between them, afford to pay a mortgage. With some help from their father, they were able to put down a �13,000 deposit on a �128,000 two-bedroom semi in Measham, Leicestershire. Nick, 30, says there were no problems getting the mortgage, and in February they moved in.
Nick, a web developer, reckons he and his 26-year-old brother, a stock controller, would have struggled to buy on their own. "We've lived together for a couple of years beforehand and we get on fine ? we've got plenty of common interests," he says.
Nick supports the call for more of these sorts of deals to be made available, but says he can also appreciate the potential pitfalls for friends buying together. "With the two of us, in the long term, we know that eventually one of us will probably move out, but it's an investment."
So, how does Share to Buy work? At least two applicants must be graduates or have professional qualifications ? in accountancy or law, for example. It's a variable rate deal where you pay 0.05% over Britannia's standard variable rate for the lifetime of the loan, giving a current pay rate of 4.29%, and you are never tied in because there are no early repayment charges (ERCs).
If it is two people applying, the "income multiple" ? which dictates how much people can borrow ? is 3.75 times their combined income, or 4.25 times one income added to the other person's income. For three or four applicants, it is two times all their incomes added together, or 3.75 times the two highest earners' incomes. Borrowers will need to do the sums to work out the most advantageous combination. For example, four people all earning �25,000 a year could potentially borrow �200,000. But if the four included two people who each earn �40,000, they could borrow up to �300,000.
"The rate is OK while interest rates are low, but may have caused problems when they start to rise ? therefore, the fact that it is ERC-free is good, as it should mean you can remortgage on to one of Britannia's fixed rates," says Melanie Bien at mortgage broker Private Finance. Britannia says you could remortgage on to another lender's fixed rate, but that may not be possible in all cases.
Buying with a friend, brother or sister is nothing new ? it's been happening for years, and most lenders will allow up to four applicants on a mortgage. However, many will only take the two highest incomes into account when deciding how much they will lend, says David Hollingworth at broker London & Country. Santander is notable in that it will take the two highest incomes, plus 50% of the income of the other people on the application, he adds.
Bien says that "mates mortgages" of the type marketed by Britannia have never really taken off because of a lack of demand from borrowers. "Share to Buy has had a modest take-up, but other lenders are unlikely to launch similar products unless they are certain the demand is there," she says, adding that people need to be aware of the potential downsides.
"The main issue is simply sharing with others. It's hard enough renting with a group of friends without committing yourself to something as difficult to get out of as a mortgage.
"Those friends entering into such an agreement must also take legal advice so they all know what will happen should one of them wish to leave the arrangement.
"This would not necessarily be straightforward: would the other friends buy out the leaver's share ? and would they be able to afford to? And what happens if the property is in negative equity ? does that mean the person who wants to leave is trapped until property prices improve and their stake is worth something?
"What happens if one of the party loses their job and can't afford their share? By law, the others would be liable for the shortfall, which perhaps they could ill-afford."
She adds that a mortgage is a long-term commitment, "whereas most of us can only stomach a couple of years maximum living with friends".
Source: http://www.guardian.co.uk/money/2011/jul/08/mates-mortgage-first-time-buyers
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