The new mortgage that's not as clever as it looks

A new range of mortgages has been released for first-time buyers wanting to purchase a property with their friends. But are they really as original or as practical as they look?

'Buddy up’ may be something of a cringeworthy Americanism, but it is nevertheless what our housing minister is now telling first-time buyers to do.

Yes, Grant Shapps has publicly called for more lenders to offer ‘mates mortgages’. The products would enable friends and relatives to club together to buy their first home.

The housing minister’s demands come as more and more first-time buyers continue to be blocked off the housing ladder and forced into an increasingly pricey and competitive rental sector. Indeed, in some parts of the country there are almost nine tenants searching for every single spare room.

And even if a first-time buyer can scrape together a deposit, their chances of actually getting a mortgage are still historically low. Figures released earlier this month show that year-on-year mortgage lending dropped 11% in June this year.

So how will these new mortgages side-step this property purchasing predicament? And who is offering them?

Mates mortgages

The idea behind mates mortgages is to allow first-time buyers to borrow more and club together in order to put up a larger deposit for a property. This avoids years of saving, as well as allowing the buyers to borrow more and purchase a larger property.

There are currently a couple of lenders offering such products. Britannia – part of Co-operative financial services – has a ‘Share to Buy’ mortgage offering borrowing of up to 90% of a property’s value. The deal has no fees and allows between two and four house-sharing applicants. These buyers can be friends, relatives or partners, but must all live in the property.

The scheme also requires at least two applicants to be graduates or have professional qualifications.

In terms of borrowing levels, the mortgage offers two applicants 3.75 times their combined income, or 4.25 times one income added to the other. For groups of three or four, Britannia offers two times all of the incomes combined, or 3.75 times the highest two earners combined.

Mates rates

The Britannia deal is a tracker mortgage running at 0.05% above Britannia’s standard variable rate (SVR) for the lifetime of the loan. So with the SVR currently sat at 4.24% the current rate payable on the mortgage would be 4.29%.

However this rate will almost certainly head skywards in the next year or so when the Bank of England Base Rate is upped. Fortunately, the mortgage has no early-repayment charges – meaning that you could in theory switch out to a fixed product if you suspected that rates were about to rise. But with mortgage approval rates currently so unstable, nothing is guaranteed.

Clydesdale Bank has recently unveiled a similar mortgage also allowing loans of up 90% of a property’s value. The lender is offering two different variations of the product priced at 5.49% and 4.49% fixed for two years. The catch is that the higher rate product will only be available on new-build properties and to qualify for the lower rate you will need to be employed in a specific profession. These eligible job sectors include accountancy, law, architecture, medicine and chartered surveying.

Not a new idea

Now, before I look at the downsides of buying a house with your mates (and believe me, there are a few!) I want to consider one fact about these new products that seems to have been widely overlooked. Namely, they’ve actually been around for years!

Yes, most lenders will allow you to take out a mortgage with a friend or relative – they’ll just call it a ‘joint mortgage’ and not a mates mortgage. And what’s more, the amount you can borrow using these joint deals is not hugely different to the lending levels on Britannia’s Share to Buy scheme.

According to the mortgage brokers here at lovemoney.com, many lenders will happily sign up four buyers and apply their standard lending multiples to the salaries of the two highest earners. Indeed, depending on your situation you could even find yourself able to borrow more on a bog-standard joint mortgage than on a flash, new mates mortgage.

To be honest, how much you are able to borrow will probably depend more on your credit history and salary than the lender you plump for. And as far as the idea that mates mortgages could be the ‘solution to the woes of first-time buyers’ – well, I think we can probably put that down to ‘right place, right time’ and some slick PR work on the side of lenders and the government.

In fact, just as a concept mates mortgages are not even as universally suitable as the housing minister makes out.

Downsides

When taking out your first mortgage, the factors you should have at the forefront of your mind should all relate to your own situation. How long will you realistically be staying in one location for? Will you need more space anytime soon? Can you definitely meet the mortgage payments?

Now, it’s hard enough to give definite answers to these questions when you’re buying on your own or with a partner. But if you’re planning on purchasing with a friend, you’ll need to have a lot of trust that they have also completely got to grips with the commitment they’re taking on.

What happens if your friend decides to move and you want to stay? What if they can’t make the payments? What if you have a falling out?

From past experience, I’ve found just renting a home with friends can be taxing enough as a result of these very issues.

That’s not to say that joint or mates mortgages are never a good idea. Some groups can obviously make them work. But they’re certainly not something to be rushed into.

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What do you think?

Are ‘mates mortgages’ really a viable solution for first-time buyers? Would you ever buy a property with a friend?

Let us know using the comment box below.

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