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Q & A: Avoid the pitfalls of shared mortgages By Ray Boulger
The questions 1. My flatmate and I are looking into getting a flat together as a short-term investment of about three to four years. My flatmate has very little salary, but does have about £20,000 to invest as a deposit, 2. Our combined salary is approximately £77,000 and we've agreed to split the mortgage repayments 60/40, with me paying the majority. Would we be better off using the deposit to pay off my debt and then getting a 100% mortgage, leaving me roughly £700 extra a month to invest in the house itself, or should we keep my debt completely separate and use the £20,000 as a deposit? Also, what's the best and fairest way of dividing the house at the end of the three years? 3. The added complication is that, throughout our occupancy, we'll continue to invest in the property itself. Would one of us end up out of pocket if we did this on a 50/50 basis or a similar 60/40 basis? And if one of us wants to terminate early, what would be a sensible way to work it out? The answers Ray Boulger, award-winning independent mortgage expert from broker John Charcol, replies: You are correct that if the property is split in this way, when you sell up, the £20,000 deposit will all be your friend's, and the net percentage change of the property value at the end of your time there should be applied to the £20,000 and allocated to your friend, then removed from the equation. The rest is a 60/40 split. So, in terms of who is borrowing what from whom and other ways of using the money, it's a simple matter of numbers and priorities. Keep the loans Option one is to keep the personal loans and use the £20,000 as a deposit. You've indicated that your loan repayments are in the region of £700 a month for £20,000, so even at a hefty average interest rate of 15% (if it's part personal loan and part credit cards, for example), this debt should be repaid in three-and-a-half years. If you keep your old debt, the £20,000 cash that your friend has would equate to a 6-10% house deposit, depending on loan size. I have assumed that you want to borrow as much as you can, and that you have no other savings for costs and need to keep about £4,000 aside, so can use £16,000 as a deposit. Northern Rock could lend £280,000 on its 95% product, giving you a purchase price of £296,000. It has a 4.99% fixed rate until March 2008, which would put your payments at £1,516 on a 30-year term. Consider how you want to structure the repayment of the loan. A repayment mortgage is the only way to guarantee that the loan will be repaid at the end of the term, as long as you make your repayments in full and on time. In your situation, the best idea is to take a 30-year term to keep the payments low while you have other debts to consider. Calculating the 60/40 split, and including your outstanding £700 debt, your own commitment is £1,610 a month and your friend's is £606.40. Interest-only mortgage If you think committing to a repayment mortgage will cause you to reduce your monthly payments on your personal debt, you should take the mortgage on an interest-only basis for the short term only. This way you can pay all possible cash into your higher-interest debt. Although an interest-only mortgage is higher risk, so is committing to a monthly payment that will overstretch you. As long as you have the personal loans, you're in a situation of negative equity anyway. Your priority should be to pay this off. Also, your monthly payments are high for the level of debt you have, so if you do go ahead with keeping your old debt you should shop around for a better deal, meanwhile keeping the three-and-a-half year payoff target the same - or, ideally, shorter. Pay off the debt Your second option is to choose to take a 100% mortgage and pay off your old debt, Mortgage Express will go to a £288,000 maximum loan with no higher lending charge. So in terms of loan amount, repaying the £20,000 would not impair your maximum loan limit as much as you expect. For the sake of comparison, let's keep the loan to £280,000. Mortgage Express offers a 5.64% year deal (with a £599 arrangement fee and £250 valuation) that would make your payments £1,614. This makes the monthly commitments £968 a month for you and £646 for your flatmate. The downside to paying off your debts this way is the amount of interest you end up paying over the term. The rate may be considerably better, but you've spread it over 25 years instead of three and a half. This means you'll have paid up to £18,000 in interest over the 25 years for your £20,000 debt, whereas if you kept the loan as you have it at the moment, at £700 a month the interest over the term would be more in the region of £4,000. This is a matter of priorities - namely, whether you feel that the short-term benefits outweigh the costs of the long-term interest. Proportional representation In terms of extra money that you pump into the mortgage, the easiest option here is to keep to the 60/40 rule for everything - if you always agree to put in a 60% share of your friend's 40% equivalent, you shouldn't come unstuck. When you're buying with a friend, there are some other things to consider. For instance, you should take legal advice on the tenure - a purchase between friends is normally arranged on a tenants-in-common basis, meaning you own a set percentage (it is here you would declare your 60/40). But you must ensure your lender is happy with this, as they would normally expect you to be 'jointly and severally' liable for the whole debt and not just your share. Also, arrange at least life assurance, and preferably critical illness cover too, and write a will to ensure that your part of the property and the payout from the life assurance policy both go where you intend. It's surprising how many people assume that all their property would automatically pass to their parents.
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