'Mates' mortgages: why borrowers and lenders are cautious
Published: 12 July 2011 | Author: Bernard Clarke
Much of the press coverage of the latest first-time buyer summit earlier this month focused on the housing minister’s call for more widespread availability of "mates mortgages" to help address affordability problems.
Our data shows that the main hurdle for first-time buyers currently is the size of a deposit, rather than the cost of monthly mortgage repayments. In the first quarter of this year, a typical first-time buyer spent only a relatively modest 12.7% of his or her income on mortgage interest, compared to more than 20% in the second half of 2007. But the same buyer in the first three months of this year would have paid an average deposit of 21% of the price of the property, more than twice the average of 10% in 2007.
On the day of the summit, housing minister Grant Shapps reportedly said: "If there are mates who are perfectly capable of paying their monthly mortgage payments but struggling to fund a deposit on their own, there should be straightforward options to unite with their friends and take the first step on to the housing ladder together."
But although some lenders do offer mortgages to groups of friends wanting to buy together, demand from buyers for this type of loan is limited. There are good reasons why both borrowers and lenders are cautious given the potential problems associated with "mates mortgages":
- What happens if, for example, one of the joint borrowers is unable to pay his or her share of the mortgage? Those buying together, whether as a couple, family members or as friends, are almost always liable "jointly and severally" for the mortgage repayments. In other words, each borrower individually is liable for the whole mortgage payment.
- What happens if a joint buyer wants to sell his or her share unexpectedly and move out of the property? Young people in the early stages of their working lives often go through unforeseen lifestyle changes – perhaps needing to move suddenly to a new location in pursuit of a job as their career develops, or deciding to settle down with a partner.
- How would a group of young people cope with the unexpected breakdown of the relationship underpinning their joint purchase? Relationship breakdown among couples is a common cause of mortgage payment problems, potentially triggering the sale of the property. But a financial commitment between a larger group of friends looks even more prone to this kind of uncertainty than an arrangement between a couple.
Historically, there have been circumstances encouraging a greater take-up of "mates mortgages." But when this has occurred, it has also exposed their flaws. In 1988, the government announced that multiple tax relief for home-buyers would end later that year, providing a short-term incentive for people to group together to buy a home. Even then, however, take-up was limited, and the subsequent breakdown of these arrangements led to mortgage payment problems for some buyers, contributing to an increase in cases of possession.
The reality is that "mates mortgages" have never been a particularly attractive option for borrowers. Our statistics show that between 1983 and 2005 (when we stopped collecting this data) purchases by three or more people accounted for considerably fewer than 1% of all first-time buyer transactions – totalling no more than a few hundred cases per year.
There are a number of reasons why "mates mortgages" are not attractive, particularly in current market conditions. One of the key benefits of owner-occupation is that it confers greater security and control over living arrangements than renting. But these benefits are significantly diluted if ownership is shared with a larger group of friends.
The case for "mates mortgages" might be clearer if house prices were rising strongly, with owners enjoying the prospect of capital growth and avoiding the possibility that higher prices could make it more difficult to buy in the future. But that does not apply in current market conditions, particularly when any modest capital gains have to be shared among a group of buyers.
Broadly, we agree with the leader in Mortgage Strategy published in the aftermath of the recent summit, which said:
"Aside from the fact that this is an old idea recycled, the negative reactions of many (to "mates mortgages") were fuelled by the fickle nature of friendship...When your housemate is someone you went to university with, met through work, went to school with or even a sibling, then irritating habits can quickly cause whatever relationship you had before to disintegrate.
"Tying such disposable relationships to a binding contract against a colossal property debt could be a recipe for disaster."