Shared mortgage with friend – what’s fair?

[Lemond1fficult]

My friend and I are looking to buy a 2 bedroom flat together in London. She will live in it, either with her DP or a lodger. For me, it will be an investment (I live elsewhere).

She has a £70k deposit and a maximum mortgage of 155k.

I have a £40k deposit and a much higher max mortgage, though I would only be looking to match her £155k.

Which gives us a total of £110k deposit and £310k mortgage (£420k max).

The idea is she will pay half of the mortgage, and her DP/lodger rent will cover the other. If she breaks up with her DP I will take responsibility for the mortgage while we get another person in.

I will pay half of building repairs/maintenance. Appliances will be hers.

We would agree to keep the status quo for a minimum of 3 years. Then if we sell, (or if her DP buys me out) I would obviously expect my deposit back + proportion of equity.

Should we see the mortgage to completion my total contribution will be 46% - so would that be my proportion of equity? This doesn’t seem fair to her extra deposit contribution, especially after 3 years. But then, she will actually be living there, in a nicer flat than she might afford on her own, so maybe that balances it out?

For the record, she is my best friend, we lived together for years so I know she’ll look after the flat, and I trust her more than my entire family. We just want to cover all our bases and make sure everything is fair to us both and agreed in the contract.

I don’t understand what’s in this for you? You’re taking a massive gamble with your deposit money for a flat you won’t live in, in a very unstable market.

That's a good question, Chariots.

I could also afford an entire property in my hometown (midlands) for BTL using the above money. But that obviously has other risks in that I'd be renting to complete strangers, and is probably vulnerable to the same instability.

What I don't want to do is leave my money sitting in a bank account, where it's depreciating with every year that passes.

This way, I have an interest in a safe property that will hopefully increase, and I help my friend.

Sounds like a crazy idea to me... buy some premium bonds

If you really want to do this, go in equals. Anything else is messy. Not sure how is a great time but as a grown up I assume you have thought it through but factor in Brexit, and potentially only a 3 year time frame any growth will be mopped up by your initial costs surely?

It may sound fine now, but you could be entering into an agreement that lasts for a few years or a couple of decades. Once you've committed your money to this, you won't have any way to get out unilaterally--you'll be relying on your friend to work with you.
If the arrangement doesn't suit in the future, you can't get your money out of the flat quickly or easily. If you need to sell or ask your friend to buy you out, you won't be in a strong bargaining position if she lives there and you don't. What if there's negative equity? Maybe in the future you no longer want the commitment of having your name on the mortgage?

My instincts were screaming “don’t do it”. You stand to lose your money, your mental health and a friendship, for very little gain that I can see.

If you press on, I’d be very wary as to whether it was actually feasible. Would any lender actually give you money for the arrangement you envisage. Which would be step one.

But please dont take any steps without detailed excellent legal advice from the best property solicitor you can find. This will be expensive but is hugely needed to protect your investment. Your solicitors will need to plan for every possible eventuality and this will take time and lots of legal fees. Issues that spring to mind immediately on your plan:

• you share repair and maintenance costs. The shower door breaks. You want to pay half of £100 for the cheapest one from B&Q and fit yourselves; your friend reckons the entire bathroom needs to be replaced and upgraded at a cost of £10k because she’ll get the benefit of a fancy new bathroom. The paint on the living room wall is scuffed. You want friend to do a DIY touch-up; she wants full professional paint job. Multiply for every possible scenario of upgrades/maintenance/repairs.

Partner moved out and you need to get a new lodger. You are happy to accept any one of a dozen people who answer the ad; friend refuses to select them for a variety of reasons. Meanwhile you are paying the mortgage and friend gets benefit of sole occupation of flat while turning down lodgers because she doesn’t fancy the look of them.

Friend and partner has a child or get married. Is it suddenly a family home with additional legal protections? Friend gets divorced and you end up co-owning with partner as well in the assets split.

Friend wants to get a large smelly dog, you are worried about wear and tear.

Friend wants to illicitly operate a business from the flat without getting planning permission.

You have massive row with friend because she has an affair with your partner or runs over your pet dog or something. You never want to speak to her again yet you own this flat with her.

Friend or partner become disabled and making the flat suitable for their use costs huge sums. You still willing to pay half?

Friend lives in a way that generates complaints of noise and nuisance from the neighbours. You can’t evict her.

Friend is a slob and allows the place become damp, dirty and mouldy.

And the big one. Friend stops paying the mortgage. Either because of something like losing her job or simply because she is chancing her arm.

Honestly it’s so hideously complicated and I simply can’t see how the certainty of having a known tenant outweighs the risk. Best case scenario for you is very low value. Worst case is really damaging to your finances and your social life.

In any case, talk to a solicitor first and often. I suspect they will advise you to run away.

Best wishes

I don't think the arrangement works. Why should your friend's DP pay "rent" to you and why should your friend effectively manage your BTL?

If you were proposing lending the deposit on commercial terms or limiting your stake to your deposit contribution that would be fairer and also make the DP part of the equation.

All things considered it would be better if you stick to ISAs and your DF and DP stick to renting till they can afford joint mortgage on their own. Your DF would also likely get a better deal from HTB than you given her deposit funds and limited income.

Thanks everyone - especially Sycamore for your detailed list of Things That Could Go Wrong. I had considered quite a few of those things before, though the full list makes brutal reading.

We're meeting tonight, so I'll discuss with her then. She is very pragmatic also, and not a hint of CF, so I'll probably just show her the thread as sure she'll understand.

This is a recipe for disaster. Just invest your money in the stock market. You will see better returns and it will be easy to cash in on your investment whenever you need it. No chance of ending up in a law suit with your best friend either.

Excellent post Sycamore!

Don't do it unless you are planning to live in it too. Even then, it's tricky. Buy a place outright and get good tenants.

If you do go ahead, I think the fairest way to split it after 3 years would be:
Both take original deposit amount
Any remaining equity (after estate agent, solicitor fees etc) is split 50:50