How Do Joint Mortgages Work?
Taking out any type of mortgage should be a decision that is carefully considered and well researched but taking out a joint mortgage has even more factors to take into account before you commit to it. When you take out a joint mortgage, you become financially associated with the other mortgage holder(s), so all applicants should be sure that they are happy to be affected by the other person’s past, current and future financial situation.
What is a joint mortgage?
A joint mortgage involves two or more people taking out a mortgage to jointly own a property. When a joint mortgage is taken out, the liability for paying off the mortgage will be split equally across the owners. Most commonly, this will be two people who are in a relationship who want to buy a home together but there are other situations where people may want to apply for a joint mortgage.
Who can get a joint mortgage?
The most common scenario is a couple buying a property together, but two or more friends could jointly buy a property, or a family member could jointly apply with someone, to help them to afford a property. The joint applicants will decide how any equity in the property will be split.
Another reason people take out joint mortgages is for investment purposes, as business partners working in the property industry.
If the mortgage applicants were not already financially associated by having a joint bank account or joint credit, then the mortgage will link them for the first time, and this can affect their credit score. Therefore, it is really important that you trust the person (or people), you apply for a joint mortgage with, in terms of believing that they will be reliable for making the mortgage payments.
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How much can you borrow?
One of the key benefits of applying for a joint mortgage instead of an individual one is that the amount a lender will be prepared to lend will be based on the income and affordability of both applicants. This usually means that the price range for the property can be higher than if you applied as a sole applicant.
The amount you can borrow will vary depending on a number of factors, but many lenders work on the principle that they would lend up to 4.5 times the joint annual income after financial commitments and the mortgage term have been accounted for. So, for example, if one applicant earns £25,000 per year and the other earns £35,000, the lender would usually be prepared to let you borrow up to £270,000 if the term is over a long period with minimal financial commitments.
The approach to mortgage lending calculations has become more comprehensive over the years than a simple calculation of multiplying combined income, as it now involves working out affordability, reviewing credit records and incorporating any other outstanding credit.
Many lenders have an online calculator that will work out how much you are likely to be able to borrow, by providing information such as your incomes, the amount you would like to borrow and the amount of deposit that you have. This calculation is not a guaranteed amount, as the lender will perform credit checks and work out your affordability based on monthly outgoings before agreeing how much to lend.
How much does a joint mortgage cost?
Applying for a joint mortgage costs the same as applying for an individual mortgage, with the same fees and other costs. The only cost difference that might apply is if you have some additional work completed by the solicitor, for example, if one applicant has a larger amount of deposit and they want that to be protected, the solicitor can put this in writing.
If you are able to put a bigger deposit down between you then this means that you might be able to get a mortgage that has a better interest rate than if you had a smaller deposit. So, this is another potential benefit to applying for a joint mortgage rather than a single one.
How does a joint mortgage work?
There are two types of arrangements for a joint mortgage. One involves a joint tenancy, and the other option is to be tenants in common. You will need to decide which option is the best for your circumstances but generally, couples applying for a mortgage together will choose to be joint tenants, with equal rights to the whole property. Under this arrangement, in the event of one person dying, the property automatically is passed over to the other owner.
If the property is sold, any profits are split equally and if the owners wanted to remortgage the property, it would have to be done jointly again.
With tenancy in common, the owners own a share in the property, so one person might have a 40% share and the other has 60%, or however you agree to structure it. The solicitor will draw up a ‘deed of trust’ to specify the percentage that each person owns.
If one person wants to then sell, they can sell the share in the property, or leave the share in their will to someone.
How does credit score affect the application?
Credit checks will be completed for every person applying for the joint mortgage. If one person has a very good credit score, this can benefit the other person and improve their chance of being accepted for a mortgage that they would not otherwise have been able to get. However, if someone has a poor credit score, this can be a disadvantage to the person with better credit, as they might get declined for a mortgage based on the other applicant’s credit score.
Before applying for a joint mortgage, it is a good idea to get a copy of both of your credit reports, so you can see what the situation is before you start the application process. One person might not even be aware of the poor credit score, so getting a recent copy is a good idea anyway before applying for any mortgage.
In some adverse credit cases, people decide to buy the property in one person’s name, as this is the only way the mortgage application will get accepted, so once you have the credit scores, if there is an issue with either of them then you will need to discuss the best option. Getting guidance from a broker might be useful for getting some impartial advice on what the likelihood is of getting a mortgage based on the specific details and to talk through the different options that are available.
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Getting out of a joint mortgage
One of the main reasons you should not rush into a joint mortgage is that circumstances can change, such as a divorce or separation. In this case, getting out of a joint mortgage is not easy and can be very stressful. You cannot simply take your name off the mortgage if you want to move out and you will have to try to find a solution that works for both parties.
You might find that one person wants to stay in the property, in which case they would need to be able to buy the other person out of the property and must also be able to get a mortgage approved for the property based on their individual income. To buy someone out, you would need to work out what equity is in the property by getting it valued and then half of the equity would need to be paid to the person coming off the mortgage.
The first step would be to talk to the mortgage lender to explain the situation and to find out whether they would be happy to remove one person and allow the other to keep the mortgage in their individual name. You would then go through the legal process of ‘transfer of equity’ but there can be many more complications involved, for example, if one person put more deposit down.
If neither person can afford the mortgage on their own, or neither wants to remain living in the property, the property will need to be sold and then the mortgage can get paid off. The selling process can also cause issues, as one party might want to hold out for a higher offer, or the property might be very hard to sell.
Once you no longer have the joint mortgage, you would also need to submit a financial disassociation request to have an ex-partner taken off your credit report to ensure that their financial situation will no longer impact yours.
When you take out a joint mortgage, you are creating a financial association that can be difficult to get out of, in the event of a breakup or other scenario, and you must also consider how the connection will impact your own credit score. If you have reviewed your credit scores and are happy to take any risk involved with that, then the next step is to find out how much money you can potentially borrow as a joint mortgage application.
Speaking to a broker such as Boon Brokers will help you to understand what the best mortgage options are based on your circumstances and they will also be able to provide expert advice on details such as when one person is paying a bigger deposit than the other. If you are considering taking out a joint mortgage, call our team today to find out the different options that are available and to find the best joint mortgage deals.