press release

Friends must ensure clean credit history to avoid future financial difficulties

A SURGE in demand for so-called ‘mates’ mortgages’* and the resultant increase in the number of lenders offering such loans has prompted fears of an accompanying leap in impaired credit records, warns online data analyst Moneynet.co.uk.

According to the British Bankers Association (BBA) and the Building Societies Association (BSA), around 60 banks and building societies are now prepared to lend to up to four applicants for a single property.

As a result of ever rising house prices, more first time buyers are looking to team up with friends to secure a first step onto the property ladder. But Moneynet.co.uk chief executive Richard Brown advises that buyers need to be confident that all parties have clean credit records.

“Unpolished credit records could see them fall at the first hurdle – and all concerned could find they are tarred with the same adverse credit footprint brush,” says Brown.

“It’s crucial for all applicants to get their credit reports checked before proceeding. Any bad credit history on the part of one person will be instantly recorded against all parties to the mortgage as they become linked ‘by association.’ This could make it hard - even impossible - to secure credit in the future.”

Brown also warns on the need to identify a lender best suited to requirements.

“Some lenders, for example, will only take the two highest incomes into account whereas others may take up to four incomes or just look at the overall affordability of the group as a whole,” he says.

“Lenders that will take all four incomes into account include Britannia, HSBC and Skipton, but it may be worth speaking to a mortgage adviser who can do the shopping around for you and negotiate with the lenders on your behalf.”

Brown also points out that, from the mortgage lenders’ point of view, each party to the mortgage is responsible for the entire mortgage debt and monthly repayment.

“So whilst you may decide to share the mortgage repayments and each pay a proportion, in the event of one party missing a payment, the lender will look to all other parties to make up the shortfall.

“In other words, you are all jointly and severally liable for the total mortgage payment - and regardless of the fact that you have paid your share, if other parties have not, the lender will look to you to make up the deficit,” he warns.

In the worst case scenario, if the mortgage goes into arrears as a result of one party missing their payments, then all parties to the mortgage agreement could find their credit file marked and their credit history adversely affected.

Ironing out credit pitfalls in advance is also recommended.

“As soon as you buy with someone else, your credit files will become linked to each other by what’s known as financial association,” says Brown.

“So if one party has a poor credit history then all other linked parties could have their credit history adversely affected by association. It’s sensible therefore to provide one another with a copy of their credit file so that each can check the credit worthiness of the others. Credit reference agency Experian provides copies of credit files at low cost,” he adds.

Moneynet.co.uk mates’ mortgage checklist

1. One of the biggest potential areas for dispute is a change in circumstances, either by choice, such as one party wishing to get married, or due to an unavoidable change such as redundancy or long term sickness.
• It’s important to consider these possibilities at the outset and to agree on how these circumstances will be dealt with - to avoid difficulties at a later stage it’s imperative to have a proper agreement drawn up after consultation with a solicitor.
2. All parties should be covered against accident, sickness and unemployment to ensure they can continue to contribute to the mortgage if any of these situations arise.
• The easiest and cheapest way is usually to arrange a Mortgage Payment Protection Policy although Moneynet.co.uk recommends borrowers take financial advice to ensure that you are adequately covered.
3. In many cases the affordability of the different parties will vary –the initial deposits may vary as well as the percentage of the monthly mortgage repayments that can be afforded by each party.
4. An agreement will be needed to deal with relative ownership of the property and share of the equity.
5. It’s sensible if the property is owned as ‘tenants in common’ rather than ‘joint tenants’ and solicitors will be able to advise on this. However, beware that in the lenders eyes, you are all equally responsible for the entire mortgage repayment.
6. It is crucial that all circumstances and eventualities are considered and proper agreements are drawn up with a solicitor at the outset. However, even the best laid plans can go wrong so what can be done if it’s not working?

Friends no more……the options

Sell the Property:

If it’s all going horribly wrong the sensible option might be to sell the property, pocket any equity and go your separate ways. If all parties are agreeable to this and you can come to an acceptable sale price then, if you’ve drawn up agreements at the outset regarding equity shares, this should be straightforward and painless.

Buy out one party:

If one party wants to leave and the remaining parties can afford it then you might consider buying out the leaving parties share. This will involve getting the property valued, agreeing on a value and raising the money to pay off the leaver. Also, the mortgage lender will need to agree to the release of the leaving party from the mortgage – this is likely to happen if the remaining parties convince them of being able to afford the mortgage without the leavers’ income. And in the case of borrowing money to buy out the leavers’ share, the lender will need to be convinced that larger mortgage will be affordable.

* BBA/BSA data, April 2007