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Questions you might be asking?


Below are a few questions you might be asking yourself. The answers have been prepared by Mogers Solicitors.


What happens if I pay my share but the other borrower doesn’t?

You are individually responsible for the entire debt, irrespective of how many people are on the mortgage. If one of your co-borrowers doesn’t pay ‘their share’ the arrears are legally your responsibility and will show on your credit record..


What if I want to be released from the mortgage?

This is known as a “transfer of equity” and you will need the permission of the lender if you want to be removed from the mortgage. Permission will not be given unless the lender is happy that the ability to pay’ is still in place.


What if I just leave anyway?

You are still responsible for the mortgage and for the monthly payment. Even if the other borrowers are happy to pay the loan after you leave a lender will still consider this to be your liability and will take the whole outstanding loan amount into consideration if you applied for another mortgage.


What if my co-borrower wants to move his/her partner into the house?

This is something you will have to agree amongst yourselves and is not a consideration for a lender unless you were creating a tenancy situation.. Your co-borrower’ partner would not have any liability for the mortgage but you should ensure that they only live in the property under licence. A solicitor can help draw up a licensing agreement  


What if I wanted to get my money out of the house and sell my share to someone else?

There are two scenarios here. Firstly that someone with cash comes along and wants to buy your share or secondly that they want to replace you on the mortgage and increase the debt to cover your share of any increase in value. In either case this is a transfer of equity and needs the lender’s permission. You will not be released from the mortgage unless the buyer is able to meet your lender’s lending criteria.


Can my parents help me with this transaction?

The simple answer is ‘yes’ and there are three ways in which they can help

  • They can become ‘guarantors’ for the loan and this means that if you don’t pay your parents are liable. This seems simple but the truth is that, as guarantors, your parents would be responsible for the whole debt and not just your share. This means that they are also acting as guarantors for the other borrower(s) and they may not be very happy with this situation.
  • They can offer their home as security for your debt. A lender could take a ‘collateral charge’ over their house (this is a legal liability that gives the lender the same power as if they had a full mortgage) and if the lender ever had to re-possess your house and was unable to cover the value of the mortgage on sale, they could then re-possess your parents house to recover their loss.
  • They could offer both their guarantee and a collateral charge. This would make them ‘sureties’ for the mortgage and they would be liable for the payment and for any loss in possession.

In any of these cases it is a big commitment for your parents and they really have to understand their legal position. The Council of Mortgage Lenders handbook for solicitors insists that they are given full and independent legal advice and a lender would want to be sure that this had happened. It is also true to say that all legal work costs money and the setting up of the guarantee, or the taking of collateral will add to your legal bill, but increasingly, as house prices have risen, parents are more prepared to help out in one of these ways.


If I put down all of the deposit do I get a bigger share in the property?

No not unless you set up a proper legal agreement. As far as a lender is concerned the deposit belongs to all borrowers and they have equal shares in the property.


Is it better to buy on my own or with someone else?

If you buy on your own you will be wholly responsible for the debt and you will also be in complete control of your financial situation but a lender can’t take into consideration the financial position of any sharers. They may allow for the rent in their calculations but not in the same way as they would if the property was for wholly letting purposes (Buy to let). There are some lenders who take a flexible view but as most large lenders have a computer based underwriting system they don’t have the capacity to treat the rent differently from other income. In reality your choice will have to be based on the way that will best help you to achieve your purchase and you need to sit down and discuss this with a properly qualified mortgage advisor.


What if I want to travel for twelve months and let my share to someone else?

lf you are the sole owner you will need to ask the lender’s permission to let and they will assess whether the rent is sufficient to meet the mortgage. They will usually apply their Buy to let criteria to this calculation and might increase the interest rate that they charge because of the change. If you are a joint borrower you will still need consent but because at least one of the owners will still be living in the property it is less likely that the interest rate will change but the new occupant will have to sign a ‘licence’ to occupy so that no tenancy is created.

Will I make enough money to buy a house of my own?

Even some of the most astute financial commentators in the country would be hard pressed to answer this question and there are so many factors to be considered that no one can guarantee that you will make money out of your house. We all know that housing in the UK has shown an increase in in nearly every year over recent decades but within this period there have also been periods of stagnation and even a very severe price crash that left a large number of people owing more than the property was worth. It is probably best for you to consider any house purchase as buying a home and rather than as an investment.

How much can I borrow?

Every lender uses their own method of calculating the maximum that you can borrow and this is determined by two things. Firstly, the amount you earn and, secondly, the value of the property.

Now for the technical bit.  The Financial Services and Markets Act 2001 governs all owner-occupier residential lending and from 31st October 2004 these loans were classified as Regulated Mortgage Contracts (RMCs). This means that the lender is bound by legislation to make sure that it only lends you the amount that is considered to be affordable but unfortunately there is no consistent approach towards assessing affordability. The traditional way of assessing this is known as the ‘multiplier’ and the lender simply takes your income and multiplies it by a figure (this can range from 3 to 5 times) to arrive at a maximum loan but the only real way to find out how much a lender will give you is to ask them.

The maximum loan will also be limited by the Loan to Value. No lender can offer a mortgage of more than 100% of the value of the property although there are some lenders that advertise larger percentage loans. This is because the excess over 100% is not secured on the property and is not therefore technically a mortgage. The normal maximum loan is 95% of the purchase price or value, whichever is the lower, and the lender may require additional security to cover any borrowing above 80%. You need to talk to a mortgage advisor to find out the maximum that any lender will offer you in this respect – and be aware of what is known as the higher lending charge, which is a charge to borrowers who borrow a high percentage of the purchase price or value.

What is the best property to buy?

This is down to individual choice and a lender will not advise on this unless the property is considered to be an unsuitable security. Unsuitable securities can range from flats in tower blocks to pre-cast reinforced concrete construction. Every lender has its own policy on acceptable security and a quick phone call should resolve the matter.

At this point it is also worth pointing out that the law says that if 3 or more ‘households’ (unrelated single persons will count as a household) occupy a property and share the facilities it will be deemed as a ‘House in Multiple Occupancy’ (HMO) and must be registered with the Local Authority. It is also the case that if the house has more than 3 storeys and is occupied by 5 or more households it will have to be licensed as an HMO.  Failure to obtain a license can result in a fine of up to £20,000. Local Authorities also have the right to require licensing where they deem appropriate so if more than 3 of you will live in the house it is a good idea to speak to your Local Authority and make sure you don’t need a license. It is also the case that some lenders will not consider an HMO to be a suitable security. 

Is there a good way of establishing the “rules of the house” and what if someone doesn’t stick to them? 

This is personal choice but can also be the most contentious issues for sharers. Make up your minds from the outset as to how you will ‘split’ the bills, who will be allowed to stay, where you will hang up the washing etc and stick to the agreement. It might even be best to put it in writing so that there can be no argument later. There is no way you can enforce the rules but don’t make the mistake of withholding your share of the mortgage or refuse to pay your share of the bills as, in the long run, this can only hurt your creditworthiness.

Which lenders might be interested in these kinds of mortgages?

Some lenders already offer specialist sharer mortgages and you will need to carry out the appropriate research. It is always useful to speak to smaller Building Societies as their size often means that they are able to take a more flexible approach.

If there are so few lenders should I go through a broker?

Brokers have access to all of the mortgage products in the marketplace and may be able to help you but they will probably want a fee for doing so. If you find a lender that meets your needs it is just as well to speak to them but they will only sell their own products. The choice is yours but, as in all things, get some personal recommendations so that you know you will get the best service.


What if the other, or one of the other, borrower dies?

There are legal issues to be considered, such as making a will, and it would be necessary for you to take appropriate independent advice. As far as a lender is concerned the survivors would assume responsibility for the whole debt.

What is the best type of mortgage for me?

This is for you to decide in conjunction with a mortgage advisor but if you decide to take the mortgage on an interest only basis the lender will want to know how you will repay the capital.

What is the cost of taking out a mortgage?

There are various costs you will have to meet. Some of them will need to be paid ‘up-front’, some on completion (when you actually buy the house) and there will even be a fee for finishing your mortgage. The most common up front fee is the valuation fee and this so that the lender can ensure you are offering them a suitable security. You may also have to pay an administration or booking fee so that the lender knows you are making a serious application. At completion you will have to pay an arrangement fee and you need to be very aware of this as some lenders now charge a percentage of the loan amount and this can be a very large fee. You will also have to pay the lender’s cost for telegraphically transferring the money and there may be a charge for arranging buildings insurance over which the lender has no control. Make sure you are fully aware of all of these costs as they can be significant. Don’t forget that you will also have legal fees and maybe stamp duty to pay. 

I have a good credit history but my co-borrower has had problems. Will that affect my ability to get a mortgage?

The simple answer is ‘it depends’. It depends on the nature of the credit problems and what caused them. There is no doubt that it will make it much harder for you to get a loan and you may have to pay a higher interest rate to secure a mortgage. Unfortunately you can’t be separated from the other borrower because your are both liable to the entire debt. 

A word of warning - It is also a very silly idea to try and ‘hide’ any previous financial problems as they may well show up on a credit history. If the lender thinks that you have misled them they will reject your application and you will also have to declare the rejection on any future mortgage application. The new lender is going to expect you to explain why you were rejected and may well be unhappy with your explanation. Also bear in mind that failure to declare information correctly may be construed as an attempt to defraud and all lenders view this very seriously.

I have heard a lot of jargon when talking about mortgages but what does it all mean?

Unfortunately financial institutions do like to use jargon and acronyms and this can make it seem like a foreign language. In reality it is quite simple but as a small to some of the most commonly used terms. It is placed in order from the start to the finish of the transaction:

Glossary

IDD or Initial Disclosure Document: This is a legal requirement on a lender. Before you even discuss the mortgage the advisor must give you this form as it lays down the terms under which the lender operates.

KFI or Key Facts Illustration: If you are buying a home for your use the lender is obliged under law to give you an illustration of the cost before you can even complete an application. You can then use this to make sure that any Offer of Advance properly reflects the original terms that you agreed 

LTV or Loan to Value:  This is a simple calculation showing the how much the loan is in comparison with the value of the property.

Security: This is the property you are buying and offering to the lender as ‘security’ for the loan

Valuation: This is a very basic report on the condition of the house but is not a full survey. It is prepared for the lender and only the lender has legal rights against the valuer. Unfortunately you pay the lender’s bill for the inspection If you want a thorough inspection of the house you will need to arrange a ‘full survey’ or a ‘house buyers report’.

Offer Of Mortgage: This may be called an offer of loan as well or more generally just ‘an Offer’. It is what it says it is. This is the lender’s formal offer of money in writing and shows the terms and conditions under which the lender is prepared to give you the loan.

The Advance:  Just another name for the loan

Exchange of Contracts:  This is when you become legally committed to the purchase. There is usually 4 weeks between exchange and completion but this is not a hard and fast rule. In fact, it is not unknown for exchange and completion to happen on the same day.

Completion: This is the day when money ‘changes hands’ and you become the legal owner of the property.

Legal Charge: This is a document that is registered with the Land Registry and which gives the lender a legal mortgage.

Stamp Duty: This is tax on the buying of property and you are liable. There is no stamp duty for the vendor.

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This information has been provided by:

Bath Building Society

Bath Investment and Building Society are members of the Building Society Association, participants in the Financial ombudsman Service and authorised by and regulated by The Financial Services Authority (registration number 206026)

YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.  THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME.

 







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