With house prices at record high levels, and salaries not keeping pace, it is widely accepted that it has become increasingly difficult for first time buyers to buy their first home. Adam Crawford, Partner at Prince Evans Solicitors LLP, looks at alternative ways to buy your first home
The options
- Buying with friends
- The bank of Mum and Dad
- Mortgage guarantor
- Shared ownership
- Help to Buy: Equity Loan
In this article, we look at the legal aspects of these alternatives.
Buying with friends
One option for buyers who cannot afford to buy a property alone is to buy with friends. This is becoming an increasingly popular choice.
Things to consider
If you are considering buying with a friend then there are legal aspects you should consider before deciding if this is right for you, such as:
- What deposit and initial contributions are you both making?
- Will the mortgage/outgoings be split equally between you?
- What happens when you wish to sell the property or if only one of you wishes to sell?
- What happens if someone dies (morbid yes, but it must be considered)?
- What happens if you fall out? How are future price increases shared?
When you buy a property with another person you hold the property as “joint tenants” or “tenants in common” and it is important you take advice from a specialist conveyancing lawyer who will be able to explain the difference to you and the options available to you. In most cases of buying with a friend, your lawyer will advise you to hold the property as tenants in common (where you can own different shares and the property does not pass to the survivor in the event of death) and may recommend you enter into a Declaration of Trust to reflect your ownership wishes and to address the questions above.
It is strongly recommended you discuss these points with your co-buyer friend, and instruct your lawyer accordingly, before you make the commitment of buying together, as while this may seem like a good idea (and often proves to be) the reality can often be very different, and it is best to be prepared for such an eventuality.
The bank of Mum and Dad
The bank of Mum and Dad is where parents (or another relative or friend) gift you money towards the deposit of the property you are buying.
Things to consider
If you are fortunate enough to be in a position where parents (or another relative or friend) are able and willing to gift you a deposit or part of it then you will need to consider the following legal aspects:
- The deposit must be a gift and not a loan – if the money is a loan then it is highly unlikely any mortgage lender will accept this arrangement.
- Your parents (or whoever makes the gift) will need to sign a “gift” letter confirming that the money is a gift and that they will have no legal interest in the property. This will be required both for your lawyer and the mortgage lender.
- Your parents (or whoever makes the gift) will need to provide evidence of the source of funds. This is not your lawyer being difficult but is to comply with Anti- Money Laundering Regulations. Any lawyer will have to ask for this (as well as for any funds you are contributing). This is evidenced by your parents (or whoever makes the gift) explaining where the funds are coming from and providing documentary evidence to support this. For example, if this was from their own property sale then they could supply evidence of the sale, if it is from their own savings from their salary etc they can supply several months bank statements showing the salary being paid into their account and the savings increasing. Your lawyer will be able to explain exactly what is required dependant on the nature of the gift.
- Your parents (or whoever makes the gift) will need to satisfy your lawyer’s identification requirements.
Finally, your parents (or whoever makes the gift) would be recommended to seek independent legal advice if they have queries or require any advice relating to their gift.
Mortgage Guarantor
It may be possible to have a relative or someone else as a guarantor to your mortgage. This is generally for people who the banks may be concerned cannot afford the mortgage payments alone. There are two options which are either “sole proprietor joint mortgage” – where the buyer(s) is named as the owner of the property but both are named on and liable for the mortgage, or the more traditional mortgage guarantor where the mortgage and property are both in the sole name of the buyer(s) but with the guarantor guaranteeing the mortgage payments.
Things to consider
If buying with a mortgage guarantor, then consideration needs to be given to the following points:
- The mortgage guarantor will need independent legal advice as to the commitment they are making, ie if the buyer defaults on the mortgage then the mortgage guarantor will be liable for the mortgage payments.
- There is a moral not just legal responsibility on the buyer to ensure they keep up the mortgage repayments. A buyer who gets into difficulties with their payments and has to rely on their mortgage guarantor could cause a rather unpleasant breakdown in the relationship between the buyer and guarantor.
Buyers are advised to be honest with guarantors if they do get into or expect to get into any difficulties with payments.
Shared Ownership
Shared ownership is where you part-buy and part-rent a property from the landlord, normally a housing association. The rent you pay is subsidised and this is a popular product for first time buyers.
Things to consider
Other articles will explain this in more detail, but some of the legal aspects to consider are:
- Staircasing – a feature of shared ownership is that you can normally buy additional shares in the property up to the value of 100% ownership – this process is known as staircasing. To do this, the property will be valued by a
RICS valuer and you will pay the percentage share price you are buying based on this valuation. If you are staircasing to less than 100% ownership then the housing association will financially assess you to ensure that you are not buying more than you can afford. - Rent – you will pay rent on the share you do not own. The rent is subsidised and generally when the property is first sold it will be set at 2.75% of the full market value of the property (although may be higher or lower). So, if you were buying a 25% share of a new build shared ownership property for £250,000 the rent payable would be £429.69 per month. If you are buying a “resale” shared ownership property (ie an existing non-new build property) you will continue to pay the rent at the current rate payable by the seller. The bigger your share, then the less rent you will pay. Rent increases annually generally by RPI plus 0.5%.
- Resale – when you want to sell the home you will have to first offer the property back to the housing association, which will get a period of time (usually eight weeks) in which to find a buyer. The price will be set based on a RICS valuation. If a buyer is not found within this period then you can sell on the open market.
- Restrictions – the shared ownership lease will prevent you from renting out the property. It must be your residence. When you buy a shared ownership property you do not need to be a first time buyer but you must not own another home (unless this is being sold) and you must earn less than the maximum household income (currently £80,000 out of London and £90,000 in London).
This is just a very brief overview of shared ownership. Your lawyer will provide more detailed guidance (which is why you should ensure you use a lawyer with considerable expertise in this area).
Help to Buy: Equity Loan
A Help to Buy: Equity Loan is a popular product where the Government lends you up to 20% (or 40% in London) of the cost of your home – this can only be used for the purchase of a new build property and only for first time buyers. This means you will only need a 5% deposit to buy your property.
Things to consider
Again, other articles will go into more detail but the following legal aspects should be considered:
- No loan fees or interest is charged on the Equity Loan in the first five years (ie there is nothing to pay for five years).
- After five years, interest is charged at 1.75% and increases annually at CPI
plus 2%. - When you sell the property, the loan must be repaid on the percentage basis, ie if you have a 20% Equity Loan you will repay 20% of the property value when you sell (irrespective of whether prices have increased or decreased).
To be eligible for the Help to Buy: Equity Loan scheme, you must be a first time buyer and the home you want to buy must be newly built with a price of no more than the regional cap which has been set for the region where you are buying the property (This is £600,000 in London and lower in other regions).
This is just a very brief overview of the legal aspects of some alterative methods to take your first step on to the property ladder. It is important you take more detailed legal advice from a specialist lawyer before proceeding with any of these alternative arrangements.
Prince Evans specialise in all aspects of new build property. Please contact Prince Evans’ New Build Homes team for all your conveyancing needs and for a friendly no obligation quote on 020 8567 3477 or nbh@prince-evans.co.uk
