Recently this column called on financial institutions to produce more home loan products that reflected what I believe will be increasingly diverse forms of housing tenure.
Consequently I was encouraged by the news, released shortly afterward, that Marks & Spencer Financial Services had introduced a mortgage that enabled up to four people to buy a home together. Allowing four applicants on a single mortgage is not unique, but up to now has been confined to small specialist lenders, so the fact that a national brand like Marks & Spencer has joined them is something of a breakthrough.
For a start this will, in theory at least, give four flat-sharers the opportunity to buy rather than rent a property. At present buying is likely to be cheaper than renting, especially as – in this case - the associated expenses of the former (legal, surveying fees, etc) will be split four ways.
However, the real advantage of this type of mortgage is that it gives all four applicants a toehold (rather than a foot) on the housing ladder, which will stand them in good stead even if a monthly mortgage repayment becomes dearer than a monthly rental as a result of higher interest rates at some future stage.
At present the hurdle facing most young people who currently rent but hope to become owner-occupiers, is the size of mortgage deposits. While saving to amass this deposit (especially if it comes with lifestyle sacrifices) is admirable, any interest gained on deposit is risible and easily wiped out by the current rate of inflation. Even the government exemption from tax on the first £1,000 of annual interest benefits only relatively few sectors of the population.
Most people saving to buy a house need access to their cash on the basis that if a suitable property becomes available they need to act quickly. At present the best easy-access accounts are offering circa 1.25 per cent; so if a couple have £25,000 saved for a mortgage deposit the annual return will be just over £310 – tax-free. However, at a more “normal” 4 per cent (available before the financial crash) the interest would have been around £1,000, which with tax at 20 per cent equates to £800 net.
Greatly superior returns are, of course, potentially available through stocks and shares ISAs. But these are subject to peaks and troughs so, understandably, young aspirants to home-ownership are unwilling to risk their portfolio troughing just when they need the money most.
So taking a share in stone and mortar (even a quarter-share) seems to me to be a good route to eventually becoming the sole owner (or jointly with a spouse or partner) of another property later on. The exception would be those looking for a house in a post-industrial area where a depressed local economy is reflected in a static local housing market and therefore price rises are not “running away” from savings.
So far, so good. The monthly mortgage payments are likely to be manageable and, as stated, a four-way split means associated outlays should not be too onerous. Any problems are likely to occur further down the line – when one of the quartet gets a new job in another part of the country, or wishes to get married, or they simply fall out (and, even worse, one of them does a midnight flit).
When a group of people rent a flat they are, under the terms of the agreement, “jointly and severally” responsible for the rent and keeping the place in an acceptable condition – which means that if one of them disappears and cannot be traced, then those remaining are still responsible for paying the rental share of the departed person, as well as for any damage that individual may have caused. Such a situation can become a recipe for arrears and all sorts of associated financial problems and the whole arrangement – which began with so much confidence – degenerates into a mess.
Consequently, I would imagine that a joint mortgage involving four relative strangers will have even stricter conditions and needs to be taken very seriously by any applicants.
David Alexander is MD of DJ Alexander
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