The perils of buying with friends
Rising house prices make shared ownership a good option, but stamp duty is a problem when owners move on,
‘The additional problem now is the 3pc stamp duty surcharge when you want to buy again’
Like many twentysomethings, Rob Petherick and his best friend Chris Potter had been encouraged by their parents to get on the housing ladder as soon as possible.
So the two men, who had met as undergraduates and remained firm friends ever since, did what growing numbers of younger buyers are doing: they bought together.
Two years ago they took the plunge and went halves on a two-bed flat in Battersea, southwest London, for £510,000, with help from their families.
They talked about potential issues arising in the future, such as relationships and death, and bought life insurance to protect themselves.
“It was the most grown-up we’d ever been,” said Petherick, 29.
They bought the flat with the intention of “owning it for ever”, but agreed to review the situation in February 2019.
But Petherick is now in a serious relationship and is keen to set up a new home with his girlfriend Rebecca Holmes, who is also currently living in the Battersea flat. However, since Petherick bought his flat, the rules have changed. Now if he buys a “second” home he must pay a 3pc stamp duty surcharge – that’s an additional 3pc on top of the standard stamp duty rate.
Petherick, who works in advertising, feels the Battersea property is worth hanging on to because of major developments in the area. He expects property prices in the area to be boosted when Battersea Power Station is added to the London underground network in 2020. But he resents the thought of paying stamp duty twice.
“It’s frustrating as I won’t be the sole owner of either of the properties”, he said.
His flatmate Potter, meanwhile, plans to stay in the flat, so Petherick will let his room out. His share of the mortgage is £215,000 and his monthly mortgage repayments are £670.
Petherick and his girlfriend have a combined salary of £119,000 and both have savings. He has a “rainy day” fund of £2,000, while Rebecca has savings of £22,000.
Both of their families have offered money to cover a substantial deposit on a £500,000 two-bed garden flat in south London.
What the experts advise
David Hollingworth of mortgage brokers London & Country
The change in Petherick’s circumstances is a good reminder to those buying with a friend of how important it is to consider the “what if ” scenarios at the outset.
Maintaining ownership of the original property and then buying jointly with Holmes will mean that the stamp duty surcharge would apply on the entire purchase price.
Buying at £500,000 would therefore attract a stamp duty bill of £30,000 rather than £15,000 if there’s no additional property.
Holmes does not earn enough to take on the mortgage alone, even taking account of the healthy deposit gifted from parents.
To bring Petherick’s income into play would require him to be a joint applicant on the mortgage and in most cases lenders will also require applicants to be jointly entered on the property title. That would trigger the additional property stamp duty surcharge.
Some lenders are able to consider joint applicants but only have the title in a single name. This could offer an opportunity to avoid the increase in the stamp duty bill. This option can be useful where parents who already own their home wish to help boost their child’s borrowing power.
They can be on the mortgage without incurring higher stamp duty and potentially encountering capital gains tax issues at a later date.
There isn’t a huge range of lenders that can consider this approach and some, such as Bank of Ireland and Metro Bank, will expect the joint borrowers to be a close relation.
However, there are others, including Barclays and Hinckley & Rugby Building Society, that could consider Petherick as a joint borrower, and allow Holmes to be the sole owner on the title deeds.
That would allow his income to be taken into account in deciding how much they can borrow.
It could help in sidestepping the stamp duty issue, but Petherick would need to consider the fact that he will not then be a joint owner of the property.
Jonathan Harris, of mortgage broker Anderson Harris
Property prices have soared so much compared with incomes over the past few years that first-time buyers purchasing a property on their own are rare.
Many people who are not in relationships are clubbing together with friends, siblings or family members instead.
Rob Petherick has now met someone else and understandably wants to buy a property with her, which isn’t uncommon either.
The additional problem we now have is that there is a 3pc stamp duty surcharge to pay on the purchase of a second home.
There is a range of dubious stamp duty mitigation schemes, which should be given a wide berth, but there is a legitimate and viable option potentially available.
A limited number of mortgage lenders offer joint borrower/sole proprietor mortgages, which enable two borrowers to combine their borrowing capacity to maximise mortgage lending but with only one of the applicants listed on the deeds.
Mortgages on a joint borrower/ sole proprietor basis are provided by a limited number of lenders which each have varying underwriting criteria.
With regard to the family members providing cash towards the deposit, this should be a gift rather than a loan, or the lender will take it into account when assessing affordability, and would mean a smaller mortgage for the couple.
“Guarantor mortgages” have all but disappeared, with lenders moving towards products such as the Barclays Family Springboard Mortgage or the Family Building Society Family Mortgage instead.
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.