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Rising house prices over the past few years which have not been reflected by increases in salaries can make shared ownership look like a good option but sharers should be aware of some pitfalls.
Often people are encouraged by their parents to get on the housing ladder as soon as possible. As a consequence people are buying together. Imagine this – two people, Bertie and Orlando, who had met as under graduates go halves and buy a flat together having discussed potential issues which may arise in the future such as relationships and death and bought life insurance to protect themselves. The intention was to own the flat forever but they agreed to review the situation in 2020. But, Bertie is now in a serious relationship with Cat and is keen to set up a new home with his girlfriend who is now living in the flat with him. However, since the flat was bought the rules have changed with stamp duty on second homes attracting a 3% surcharge on top of the standard duty rate. The widely held view is the flat is likely to appreciate in value quite considerably in the near future as a result of improvements in the local infrastructure and the residential conversion of an office building so Bertie would quite like to keep it and buy somewhere else with his girlfriend, Cat. His joint owner of the flat, Orlando, would let out the spare bedroom which would cover Bertie’s share of the mortgage and his and Cat’s parents have offered to help with the deposit on the new flat.
The change in Bertie’s plans is a good reminder that those buying with a friend need to consider the ‘what if’ situations at the outset. Maintaining ownership of the original property and then buying with Cat will mean the stamp duty surcharge would apply on the entire purchase price so buying at £500,000 would attract a stamp duty bill of £30,000 rather than £15,000 if there’s no additional property.
Cat does not earn enough to take on the mortgage alone in spite of having a healthy deposit from parents. For Bertie’s pay to be considered would require him to be a joint applicant on the mortgage and in most cases a lender will also require joint applicants to be jointly entered on the property title. That would automatically trigger the additional stamp duty surcharge.
Furthermore, if family members are gifting a deposit, it is worth ensuring the correct legal documentation is also in place, particularly if the financial support is coming from one side. Those parents will want to protect their money if the couple split so that it is returned to them should the property have to be sold, rather than split equally between the two parties.
It is becoming increasingly difficult for first time buyers to buy on their own so all eventualities have to be carefully considered when buying with friends.