How to buy 50%... sharing with a private investor

Posted on 4 May 2008

Bit of a convoluted question but I hope you can help...! I am a first time buyer and I'm considering a shared ownership type arrangement with a family friend who is looking to invest in property. Would it be possible for us to purchase a property on the open market jointly (say with me owning 50% and my investor 50%)? And if so how would I go about getting a mortgage?

Can I get a mortgage just for my part or would my investor and I have to get a joint mortgage for the whole amount less our deposit? My investor could probably fund his share through existing savings or I guess if he did need to borrow, he'd probably prefer to extend his own mortgage (i.e. on his home). Would that be feasible in light of my requirement to get a mortgage for my share?

Also I notice that for the housing association shared ownership schemes you have to pay some element of rent as well. With our private arrangement rather than paying rent I wondered whether it would be possible to formalise some kind if arrangement that my investor gets back as higher share (%) of the sale value when we eventually sell - say after 5 years? So if we brought the property on a 50:50% basis, that maybe he'd get an extra 1% per year so that after 5 years he'd receive 55% of the sale value and I'd receive 45% - I'm hoping that the current price falls are short term and that by then the prices would have increased - at last by 5% over 5 years so I don't get negative equity!

I understand that the mortgage market is pretty selective at present so I'd appreciate any advice with regards the feasibility of getting a mortgage, taking into account the above and also any advice on the legalities of our proposed arrangement.   Any help / advice you could offer me would be greatly appreciated.

Hi Victoria,

The reason it is unusual to have a mortgage on part of the house is that all people named on the deeds need to be signed up to the mortgage, because if it is only you on the mortgage, you don’t pay it and the lender has to repossess, they can’t repossess half a house, and the person who owns the other half has every right to refuse they take the house from him.  So you have two choices really:

1. If you get a straight-forward joint mortgage it would certainly give you a fuller choice of lenders as it would simply be the same as a normal couple buying with a joint mortgage, however, it may be inconvenient for your investor if they want to get a mortgage for themselves somewhere for any reason, even if you are actually making the full mortgage payments, the lender would not see it like that, officially you are both legally liable for the whole debt jointly.

2. Buy the property alone as if you have a 50% deposit, and then have your investor lodge a ‘non interest bearing’ second charge for 50% of the value. The solicitor will set this up for you.  The charge has to be lodged after the completion has gone through.

I can see why you feel you need to offer your investor a higher split of the profit than you would get, but be careful to make it a really easy bit of maths. My dad owns a fifth of my house because he lent me that much as a deposit, so he will get a fifth of any profit I make by the time I sell it, but you’re right, no rent is represented.  Your calculation is good, but if something happens like you don’t make 5 years, or end up with a part year, you might just prefer to say, ‘let’s call it a 55%, 45% split of the profit, regardless’ (and yes there is every chance that the property won’t increase in value).

For the legalities, you must see a solicitor.  Draw up a draft agreement and they will formalise it, there is nothing official for this, you do need to write it yourself.  The solicitor will remind you of any considerations, but for starters, make sure you establish:

·  The equity split as a simple calculation

·  Rules for taking a partner or housemate

·  What happens if the property is worth less when you sell

·  Who pays for repairs, and how large additions will affect your equity split

·  If there is a minimum ownership time, or if you’re free to take that surprise promotion in six months to another location…

·  What exactly happens if you need to let it

·  Who is responsible for insurance payments

·  Do you want life assurance for each other’s benefit?

Finally, if you go down the route of a simple joint mortgage, the solicitor will explain the difference between ‘joint tenants’ and ‘tenants in common’.  Whilst he will recommend that you become tenants in common so that you each own a certain split of the house, be aware that the lender normally won’t allow it.

Best of luck.

Katie.

 

Category: First-time buyer, Guaranteeing & buying with child, Shared ownership

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