Editor’s Note: This story originally appeared on Point2.
As house prices rise and popular markets become increasingly competitive, getting your foot on the property ladder can seem a distant goal. However, there are ways to improve your chances.
Taking out a joint mortgage is one such option. By splitting the financial burden, things suddenly become a lot easier.
There are certainly plenty of advantages to this solution, but it’s by no means the answer for every scenario.
As with all things, there are two sides to the coin, with various disadvantages to be aware of. What works for one couple won’t necessarily work for everyone.
With that in mind, let’s look at how joint mortgages work before discussing their pros and cons.
What Is a Joint Mortgage?
A joint mortgage is precisely what it sounds like — a mortgage in which two or more people contribute.
In the past, joint mortgages were almost exclusively taken out by spouses, but nowadays, it’s become an attractive option for everyone from family members to best friends and even strangers with a common goal.
By pooling their resources, co-borrowers can get a foot on an otherwise unreachable property ladder.
How Does a Joint Mortgage Work?
Each borrower will be required to apply for the loan, and as such, each of their credit scores will be checked. Depending on the lender, the loan can be calculated in various ways, most commonly:
the average credit score of all the borrowers is used to calculate the loan
only the highest credit score is considered
only the lowest score is considered
Once the lender has made their calculations, they’ll let you know whether you qualify for a loan, and if so, how much they’re willing to lend you and on what terms.
If your loan is approved, each borrower is then liable for the loan.
However, while the payments will usually be split evenly, it’s not uncommon for only one party to take care of all of them, such as for child-parent borrowers.
Joint Mortgage Versus Joint Ownership
While they sound the same, they’re somewhat different.
A joint mortgage means two or more people are liable for the loan. It doesn’t matter to the lender whose name is on the deed, and it’s not uncommon for one party to lack formal ownership of the property.
Meanwhile, joint ownership is all about the names listed on the deed.
When two or more people purchase a home as joint owners, they share legal ownership of the property. Interestingly, joint owners don’t necessarily have to take out a joint mortgage, though they often do.
The Benefits of Taking Out a Joint Mortgage
There are numerous advantages to taking out a joint mortgage, most of which are financial.
1. An Increased Budget
Of course, when two or more borrowers pool their finances and assets, they’re likely to qualify for a larger loan than one person alone. This tends to be the main driving force for taking out a joint mortgage, and it’s easy to see why.
With access to a larger loan, co-borrowers can browse a wider variety of homes in more desirable locations.
This means more bedrooms, a larger yard, or the perfect location for great schools, fantastic amenities, and a convenient commute.
It’s worth noting that while your budget has increased significantly, it’s still important not to overstretch.
Always think about the worst-case scenario. If, for some reason, you’re left to make the payments alone, you want to make sure it’s not entirely impossible.
2. You Can Put Down a Larger Down Payment
By taking out a joint mortgage, each borrower can also contribute to the down payment, which can significantly benefit in the long run.
With a down payment of 20%, you can avoid taking out costly mortgage insurance. While that’s a considerable figure to save up when you’re alone, it soon becomes more manageable when the burden is split.
Plus, the larger the down payment, the lower the monthly repayments and the more equity you’ll have from the get-go.
3. Reduced Running Costs
Homeownership brings with it many monthly costs, such as utility bills, maintenance costs, and taxes.
By purchasing a home with someone else, you can slash these costs, too, giving each party more money in their pockets each month.
4. It’s Easier to Get on the Property Ladder
Finally, taking out a joint mortgage can be a great way to get onto the property ladder, even if you’ll be the only one making the payments.
For example, if you’re struggling to qualify for a mortgage by yourself, an understanding parent or friend could help without having to pay anything.
If they have assets and a good credit score, just having them apply for a joint mortgage with you will help you qualify, too.
Once approved, you can take care of all the financial obligations as usual and own the property outright.
Just be advised that it’s essential to stick to a sensible budget that you will be able to afford on your own in this case.
The Disadvantages of Taking Out a Joint Mortgage
The benefits look great at first glance, but a joint mortgage also comes with a handful of risks. In the worst-case scenario, the stakes can be very high, with everyone involved losing out.
Here’s what to be aware of before taking out a joint mortgage.
1. Circumstances and Relationships Can Change
This is one of the biggest downsides to a joint mortgage.
Things never stay the same way forever, and in time, one of the borrowers may want to back out of the deal. This could be for any number of reasons, almost all of which will be beyond your control.
In this case, if you’re also joint owners, you may have to either buy their share of the home or agree to sell. It can be even worse if you’re not joint owners, especially if your name isn’t on the deed.
Just because you’ve taken out a joint mortgage together doesn’t necessarily imply joint ownership, and the named owner can effectively sell whenever they want.
Alternatively, one party may be unable to make the payments due to illness, loss of job, or a a relationship change. This can leave you to make the mortgage payments on your own, which can be a real strain.
One way around this is to each regularly pay into an emergency fund to soften the blow of this eventuality until things return to normal.
2. All Borrowers Are Liable for the Loan
It’s not just the financial hardship that comes when one party can’t make payments. If one of you defaults, each borrower on the loan will be liable.
So, if someone misses a payment, all of your credit scores will take a hit.
3. A Joint Mortgage Can Put a Strain on Relationships
The financial burden of buying a house with someone can put a strain on even the most robust relationships.
This isn’t just about spouses either — many friendships and familial relations have been put to the test after taking out a joint mortgage. If circumstances take a turn for the worse, you can find yourself out of pocket on top of losing a close relationship.
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