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Mates mortgages and other mortgage innovations

Our mortgage expert David Hollingworth, explains the ins and outs of buying with a friend and other options for those struggling to raise the deposit and borrow enough

Mates Mortgages has become a commonly used phrase particularly when the previous Housing Minister referred to them as a possible solution to some of the woes of aspiring first time buyers.

The term sprang from the growing trend of borrowers clubbing together to pool their resources, both in terms of pulling together a larger deposit and generating more borrowing power with two (or more) incomes.

There’s nothing difficult about having more borrowers on a mortgage as most lenders will allow up to four applicants to be joint on the mortgage.  However the majority will only take the two biggest incomes into account when deciding how much they will lend.

However it’s clearly a big commitment to be purchasing a property with a friend and the implications need to be very clearly understood.  It can be difficult enough living in harmony with friends let alone sharing a big financial commitment.

A mortgage broker or lender will always insist that borrowers are ‘jointly and severally’ liable which means that it can chase any one of them for full payment if necessary.  So if one stops paying their half of the mortgage payment the lender can still seek payment from the other borrower in full.

They may want to consider how the property ownership is structured as well.  The default is usually for a property to be owned as joint tenants but setting it up as tenants in common may be more appropriate for friends.  This allows the shares to be split between the owners and importantly for that share to pass according to their will in the event of death rather than by survivorship.  In other words you can leave your share to family rather than it simply pass to the other owner.

It makes sense to think about whether everyone has a similar plan and timeline in mind.  Even then things can change, for example if one of the group wants to move in with a partner or a job change necessitates a move.  It therefore makes sense to consider what would happen if one of the owners wanted to move on.  It could pay to take independent legal advice to understand the implications and to formalise things, in order to avoid problems further down the line.

Most borrowers will prefer to go it alone if they possibly can rather than ganging up with friends.  That means that they face the two challenges in the current market in how to amass a deposit and/or whether they can manage to borrow enough.

As a result many first time buyers have had to have help from parents.  Lenders have recognised those problems and attempted to develop products to harness parental help in offering a mortgage to a high percentage of the purchase price.

For example, the Barclays Family Springboard Mortgage allows the child a mortgage of as much as 95% of the purchase price if the parent locks away a further 10% in savings.  Others have used a similar approach but use spare equity in the parental property rather than cash as additional security.

Other innovations have looked to address these issues.  Saffron BS offers a Rent to Buy mortgage to local buyers with small deposits but with a good track record of rental payments to help assess affordability.

Bath BS has targeted help at those buying on their own but with an intention of letting a room to a lodger to help reduce the monthly burden – a mates mortgage with a twist!  Most lenders will not take lodger income into account when assessing affordability but Bath BS is prepared to allow as much as half of the mortgage to be covered by that lodger income.  However the buyer will need a 20% deposit.

The new Help to Buy provisions announced in the Budget could prove to boost hopes for those struggling with deposit and affordability.  This will see an extension of the current Firstbuy shared equity scheme to all borrowers, not just first time buyers, that are looking to purchase a new build property.  The Government will provide an equity loan of up to 20% which is interest free for the first 5 years and even after that attracts only a small charge.  That loan is repaid when the property is sold at the same percentage of the sale price.

The second element will take time to pull together but hopes to use a Government guarantee to help incentivise lenders to offer options for buyers with small deposits.  That could make a distinct improvement for mortgages at as much as 95% f the purchase price, a sector of the mortgage market that has been woefully undeserved in recent years.

There’s no easy way round the issues for any buyer, not just first timers, in the current market and the golden rule of saving a bigger deposit to improve rates and options is likely to remain true.  However, there is some innovation from mortgage lenders to create products that might still be niche but offer some help to some buyers.

David Hollingworth  

Associate Director, London & Country Mortgages


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