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Tenants in Common Mortgage | 6 Pros & Cons
Houses are expensive and mortgages can be difficult to get - especially if you’re leaning on just one income. While married couples are typically catered for with joint mortgages that list both spouses as homeowners, are there other options?
The answer is yes - a tenants in common mortgage is a flexible arrangement that can be designed with your specific needs in mind, allowing two or more people to buy a house together.
Tenants in common mortgages are tailored to your specific needs; there’s no need for the split to be equal and each person is treated as a separate investor with dedicated shares and their own rights regarding who they pass the property to in their will, and the freedom to sell their share without requiring consent from the other owners.
Working hand-in-hand with an experienced mortgage broker is essential to avoid the pitfalls that can come with a tenants in common mortgage. Thankfully, we’re here at Clifton Private Finance to provide the expertise and support you need for a smooth home-owning journey.
The 6 Pros and Cons of a Tenants in Common Mortgage
When it comes to sharing the finances of buying a house, a tenants in common mortgage is the ideal solution for many - however, it’s not without its difficulties.
Careful planning and agreement between all parties is vital to see a tenants in common mortgage through. Thankfully, the flexible and customisable nature of the mortgage is ideal for successful shared home ownership.
PRO: Division of Shares
The closest approximation to a tenants in common mortgage is a joint mortgage.
This is the typical mortgage structure for married couples looking to buy a family home, but while it does have two names on the contract, a joint mortgage tends to treat the couple as a unit and, should the mortgage need to be split up or the home sold, it is clear on the structure - each spouse is entitled to (and responsible for) 50%.
This means that each of the homeowners can purchase the amount of the home that they can afford, both in terms of their initial deposit and the monthly mortgage payments.
Those with greater income, larger savings, and a more powerful affordability rating are able to take on a larger share of the home, while those with more humble means can still afford to get on the property ladder without putting their finances under undue strain.
A tenants in common mortgage also allows for more than two shareholders of the property.
Three, four, five, and even six-person tenants in common mortgages can be arranged. This can be especially useful for buying a large shared house (say, for student accommodation), or for investors looking to secure a portion of a significant property (mansions, hotels, castles, etc.). In every case, the shares are apportioned to reflect each individual’s contribution.
PRO: Personal Share Freedoms
The shares you own in the property, and the corresponding portion of the mortgage, are entirely yours to pass on as you wish.
Legally, you do not need to consult with the other owners should you want to sell your shares to anyone, nor do they have any say about who would receive your shares as part of your estate upon your passing.
This is in contrast to a joint mortgage, where shares typically pass to the other homeowner by default.
PRO: Excellent for Investors
The flexible nature of a tenants in common mortgage make it an excellent and simple-to-administer way to invest in property, allowing investors with smaller budgets to step into the lucrative property market, or giving investors the chance to buy shares in larger properties and more desirable locations.
If you are considering a shared property investment using a tenants in common mortgage, speak to a specialist mortgage advisor at Clifton Private Finance. With our experience and established relationships with many UK specialist mortgage lenders, we can help you get the best rates and most flexible terms possible.
View some of our latest mortgage case studies below:
Case Study: Mortgage For Older Tenant-In-Common
CON: Shared Mortgage Responsibility
The mortgage contract will stipulate that all borrowers are responsible for making payments. This means if one of the borrowers fails to make a monthly repayment, the onus is on the others to make up the shortfall and meet the full payment. This is true irrelevant of the size of the share.
CON: Difficulty in Selling Shares
Anyone with a tenants in common mortgage may find it difficult if they want to leave the property.
In most cases, one shareholder leaving a tenants in common mortgage requires the other homeowners to renegotiate the mortgage or remortgage the property to cover the new distribution of shares, leading to larger mortgage payments for those who remain.
CON: Legal Requirements
It is essential that the agreement is clearly laid out in a legal document called a Deed of Trust. This binding agreement details the freedoms and responsibilities agreed by all parties and helps prevent future conflict.
The additional legal ramifications of sharing a mortgage in this way adds both cost and time to the application process.
The Deed of Trust
The Deed of Trust (or Declaration of Trust) is a legal document that details how the shares are distributed and covers the structure of ownership, associated finances, and the freedoms and responsibilities of the homeowners.
It forms part of an ongoing record that is updated regularly to keep a constant overview of finances and actions to limit conflict.
It covers:
- What percentage of the property each party owns.
- How much each person has contributed (towards the deposit, mortgage payments, repairs etc.)
- Who is responsible for paying ongoing costs, and the sharing of that (for example, maintenance, insurance, bills).
- The agreement in place should one of the owners want to sell their share.
- What actions are to be taken if one party stops paying their responsibilities.
The Deed of Trust is essential to avoid disputes over money, repairs, and the future of the property. Without it, conflicts will occur - even with the best friendships. Remember, a mortgage is a long-term contract and many life changes can happen during its lifetime.
The Deed of Trust is unique to each group of individuals. It is created by all potential shareholders discussing their ideas and sketching up a preliminary agreement that is then taken to a solicitor to draft a legally binding agreement. This is registered with the Land Registry to formalise the ownership and is regularly reviewed to update with any changes and form a record of the relevant financial history.
Two Types of Tenants in Common Mortgages
Tenants in common mortgages are arrangements made with specialist mortgage lenders and they can take the form of both repayment mortgages and interest-only mortgages.
This makes them suitable for both those looking to live in a home, repaying the principal over the length of the term with a view to eventual ownership, and for investors looking to share ownership of a property but rent it out to other tenants during the mortgage term.
Tenants in Common Mortgage FAQ
Who pays for property repairs and other major issues?
Owning the property together means sharing the financial responsibilities of the home. How the costs are split should be covered in the Deed of Trust, but it is common to split them in proportion to the ownership share, thus someone with a 60% share would cover 60% of all repair costs.
It is one of many reasons why agreeing on the responsibilities before buying the property is important; without a Deed of Trust that specifies each individual’s financial contribution to repairs, disputes are extremely likely.
The Deed of Trust should also cover cases of damage and responsibility. For example, if a 20% shareholder causes damage to their private room requiring a repair, should the other owners be responsible to pay for 80% of the repairs? An experienced tenants in common mortgage specialist like Clifton Private Finance will be aware of many of these niche cases and will be able to advise on some of the considerations that may be beneficial in the Deed of Trust.
How is insurance paid for in a shared home?
Buildings insurance will be mandatory with the mortgage. Insurance needs to be in the name of a single owner, who should arrange for the cover and take responsibility for its renewal and administration. The cost should then be split fairly as determined in the Deed of Trust (either equally or proportionate to shares).
If a major issue occurs that requires the payment of insurance (fire, flood, etc.), that payout will be divided based on ownership shares unless the Deed of Trust specifies otherwise.
Contents insurance will be individual and should be arranged by each person for their own belongings, although joint policies do exist and may be somewhat cheaper.
What if you want to get out of the mortgage?
While you can sell your share without needing permission from the others, a tenants in common mortgage can be quite difficult to exit without support from your co-owners. The options available to you are:
- Sell to the other owners - This is most usually done through a remortgage, though a cash buyout is possible if the other owners have the savings available. Note that most Deeds of Trust include a right of first refusal clause to give the other owners a chance to buy you out before you look for outside investment.
- Find an investor to buy - An investor who is interested in the property for future return may be willing to buy your share. They may then charge rent to the other owners for use of the share, or come to another arrangement. Some investors specialise in buying part-ownerships but typically pay below market value to leverage their position.
- Keep your share and rent out your room - This is possible but can be very complicated depending on the mortgage terms. Residential mortgages cannot be used to let the property, so a conversion to a buy-to-let mortgage or mixed-use mortgage would be required. This will have an impact on the other owners and would need agreement by all.
- Force a sale of the whole property - There is a potential legal route for forcing the property’s sale outside the wishes of the other co-owners, especially if you have a large share. However this will be long, costly, and damaging to your relationships and is not advisable.
- Move out and keep your share - If you are looking to move out for personal reasons, you could simply do so and keep your share of the property, paying the mortgage while it remains in place. However, this may affect you getting a separate mortgage on another home.
Can I buy out my co-owner?
Yes. If your co-owner is looking to sell, you can work out a tenants in common remortgage to redistribute the shares. However, you will have to show that you have the financial stability and affordability to cover the larger mortgage requirements.
buy for uni
Can I rent out my part of the shared ownership?
As described above in ‘what if you want to get out of the mortgage?’, it is possible to rent out your room, though it may require a change in mortgage structure that could be complicated and expensive for the other owners.
What do we do if someone stops paying their part of the mortgage?
It is essential that the Deed of Trust covers the actions and responsibilities should this occur. It is the responsibility of all owners to make sure the mortgage is paid in full every month, or debt recovery and even repossession proceedings may occur.
Can we buy someone’s share if they die?
When one of the owners passes, their share of the property becomes part of their estate and is divided as specified in their will, or passed to their next of kin if intestate.
As with buying out a co-owner during their lifetime, buying a share if they die can be done through a remortgage. Negotiations would need to be done and arrangements made with the executor of the will.
Note that there is no legal requirement for the heirs of a co-owner to agree to the sale.
Applying for a Tenants in Common Mortgage with Us
Obtaining a tenants in common mortgage requires an experienced mortgage specialist who understands the UK mortgage landscape. Clifton Private Finance have all the necessary know-how to make the process as smooth as possible.
We will:
- Find the right lender with the lowest rates to suit your specific needs.
- Advise you on the structural options and considerations for a Deed of Trust.
- Help you understand the mortgage terms and ensure you are not locked into an inflexible arrangement.
- Work with you to make the application process as easy as can be.
- Be here in the future should you need help buying out a co-owner or remortgaging.
Contact us at Clifton Private Finance today and find out how you and your friends can get on the property ladder with a tenants in common mortgage.
