Buying a house with a friend

jelajelavic

For the foreseeable future but not firm plans on how long at the moment (if we go ahead with it) were currently housemates now but renting and were sick of paying high London rental prices.

So the plan is to do it so we both get on the property ladder, some repayment goes towards capital instead of paying rent to our landlord and means we can move on in the future when we go our separate ways. We assume it will be easier to get on the property market together instead of individually and then when we are earning more and a bit older, can move on.

GreenSheep

I've not read all the replies; just your post...

Don't buy with a friend!

mr_fishbulb

It will teenadrs

bowlhead99

mrginge wrote: »

It's a terrible idea. Don't do it.

chuckley wrote: »

never mix business with pleasure, especially on such an enormous amount...

tara747 wrote: »

Don't.

Do.

It..

So, some people have strong views that it's a bad (or worse) idea, and others say it can work and have tried to be rather more constructive. But bottom line, a 500k business deal is not the sort of thing for which you reach out to anonymous posters on an internet forum.

We can give you pointers on things you might not have considered but if you make a serious life choice and financial commitment because someone says "go for it, it worked for me" or you give up because someone else says "don't go for it, I heard it might go wrong"... you are a fool.

Your problem if you want to buy in London is that bottom end 1-bed studios or small flats which can only ever be suitable for first time buyers, are selling for 10x a basic London salary and have been that way for a number of years. The desirability of London as a place to move to nationally or internationally, due to its capital city status and the types and value of jobs available there, means this state of affairs is not going to change any time soon. So a 1-bed starter home will probably not lose much in value (as borne out by London prices since the 2008 national 'crash').

However if people are already needing many years' savings on a good salary as a deposit, plus a 5x income mortgage to get that 10x salary starter home, it is difficult to see your basic first time buyer house value really rising appreciably over the next few years. Lending conditions might improve but only at higher interest rates which won't make it any more affordable for someone to get on the ladder at the bottom - and you can get more space for your money outside London - so there doesn't seem to be a lot of growth opportunity in buying a poky 250k London FTB flat. Is the market going to change so somehow they will go for 15-20x average salaries instead of 10x? And salaries are not going to move up dramatically.

If you can somehow avoid that level and get straight in to a 2bed flat or 2-3 bed house, you are then in a market which has growth opportunities because it is fed by people who already have equity / large salaries / two earners in the household, whether they are upsizing or downsizing within London or moving in from the outside world.

To me it is eminently sensible to try and pool resources for a property investment at the 'better than bottom rung of the ladder' level if it is to be your home. If you were buying to let out, the bottom level could work as there are always tenants available and two or three small places is less risky than one bigger one in terms of voids and bad tenants. But you are not looking to invest in a roof over someone else's head, you need one over yours, and so I think the 350k-500k market between two of you is more sensible than two independent places at 180-250k each.

This presumes your ability to live together is very well proven and you are both going into it with your eyes open and understand the immense hassle and complication a change in your personal status could bring. Eg as already mentioned, you want to move in with girlfriend/fiancee/unexpected child, want to relocate for work etc and can't afford the bills for two places; or want girlfriend to move in with you and she doesn't want to share with a third (or third and fourth) wheel, or your housemate doesn't want to share a living room with the two of you every evening.

I have lived with friends though never anyone I've worked with. That gives you the added potential that your housemate and best buddy and now co-owner could also become your boss or your minion. Just another sure way to completely change the dynamic from what you thought you were getting into...:rotfl:

Anyway, good luck with whatever way you end up going. It's only money, right? Half a million quid of it. But if you are young you have plenty of time to earn it all over again if it goes horribly horribly wrong - if the stress doesn't kill you, you might live to see 100+. Yay.

jelajelavic

somethingcorporate wrote: »

Do you earn enough to comfortably afford a £360k mortgage between you?

Earn between £90-100k in total so I think it should be affordable, currently paying £1700 in rent per month, which would not be an expense any more

jelajelavic

bowlhead99 wrote: »

Your problem if you want to buy in London is that bottom end 1-bed studios or small flats which can only ever be suitable for first time buyers, are selling for 10x a basic London salary and have been that way for a number of years. The desirability of London as a place to move to nationally or internationally, due to its capital city status and the types and value of jobs available there, means this state of affairs is not going to change any time soon. So a 1-bed starter home will probably not lose much in value (as borne out by London prices since the 2008 national 'crash').

However if people are already needing many years' savings on a good salary as a deposit, plus a 5x income mortgage to get that 10x salary starter home, it is difficult to see your basic first time buyer house value really rising appreciably over the next few years. Lending conditions might improve but only at higher interest rates which won't make it any more affordable for someone to get on the ladder at the bottom - and you can get more space for your money outside London - so there doesn't seem to be a lot of growth opportunity in buying a poky 250k London FTB flat. Is the market going to change so somehow they will go for 15-20x average salaries instead of 10x? And salaries are not going to move up dramatically.

If you can somehow avoid that level and get straight in to a 2bed flat or 2-3 bed house, you are then in a market which has growth opportunities because it is fed by people who already have equity / large salaries / two earners in the household, whether they are upsizing or downsizing within London or moving in from the outside world.

To me it is eminently sensible to try and pool resources for a property investment at the 'better than bottom rung of the ladder' level if it is to be your home. If you were buying to let out, the bottom level could work as there are always tenants available and two or three small places is less risky than one bigger one in terms of voids and bad tenants. But you are not looking to invest in a roof over someone else's head, you need one over yours, and so I think the 350k-500k market between two of you is more sensible than two independent places at 180-250k each.

This presumes your ability to live together is very well proven and you are both going into it with your eyes open and understand the immense hassle and complication a change in your personal status could bring. Eg as already mentioned, you want to move in with girlfriend/fiancee/unexpected child, want to relocate for work etc and can't afford the bills for two places; or want girlfriend to move in with you and she doesn't want to share with a third (or third and fourth) wheel, or your housemate doesn't want to share a living room with the two of you every evening.

I have lived with friends though never anyone I've worked with. That gives you the added potential that your housemate and best buddy and now co-owner could also become your boss or your minion. Just another sure way to completely change the dynamic from what you thought you were getting into...:rotfl:

Anyway, good luck with whatever way you end up going. It's only money, right? Half a million quid of it. But if you are young you have plenty of time to earn it all over again if it goes horribly horribly wrong - if the stress doesn't kill you, you might live to see 100+. Yay.

Yes I think our thought process to get on the market between us and that a £500k property is at the moment is it would be easier probably a better investment than 2 properties each, plus all bills etc can be split.

We would be going for London as that's were we work and live in London.

Although we work for the same company, we are not really "colleagues" and friends really, started on the same grad scheme in a very large company so would never be working on the same team. I only mentioned that to show that I know what insurance policies and salary we both earn. The fact we work for the same company definitely will not be an issue.

Are reasons for thinking of going ahead are as follows:
Have the deposit available
Basically sick of paying rent and not getting on to the property ladder and just paying expensive London rent each month
Lived as housemates for over 2 years so know living together wont be an issue
Have relatively decent salaries so want to be contributing to a house instead of just putting money in our landlord's pocket

Obviously buying a house is different to renting so just wanted to get an idea of what things to consider and there have been many useful points on the thread so far that we need to discuss before going ahead and also would need to include many in an agreement.

bowlhead99

You mentioned earlier you didn't know how long you would commit to, other than 'forseeable future'. That will be one thing to bear in mind as you look at mortgage products.

For example, if you sign up for a 3-year or 5-year fixed rate mortgage deal you get absolute certainty of monthly mortgage payment and a simple benchmark interest rate if someone has to help out the other with payments from time to time. But if you are looking to move on after 2.5 years or 4 years, before the lender has had the chance to earn as much interest from you as they were expecting, you will have an exit penalty from your lender which on the amount you're borrowing could be a big sum. This will act to trap you in the place and if one person wants to leave (or one person dies and his heirs want to sell), the penalty will cost both of you even if it's only one person really looking for the exit.

Alternatively you might go for a variable rate mortgage with no penalties, as rates will probably be flat for some time to come yet anyway. But when you're not committed to each other for long term and you are trying to save as much money on the side as you can for your next move, the deal is going to be jeopardised if the interest rate suddenly jumps from 4% to 6% in three or four years time from now and only one of you can afford the 20-25% increase to monthly payments.

Either way you are probably better taking a 30 year mortgage and mutually agreeing to overpay it each month, instead of a 20-25 year mortgage which is harder to keep up with through thick and thin.

If you do the maths on stamp duty rates, you'll notice that you could have paid £2,500 stamp duty each if both buying a £250,000 flat - but if you buy a half share of a £500,000 house, the stamp duty is £15k or £7,500 each. If you buy a £500,001 house, the stamp duty is 4% or £20k, being £10,000 each. This money goes straight to the government on top of the house price and you don't get it back when you sell. It would have paid pretty much an entire year's rent...

So the total cost of ownership in year 1 is the 20k of stamp duty and say 14k of mortgage interest (4% on 350k borrowed), plus repairs and renovations you wouldn't have in a rented flat. It is this 34k+ you need to compare against your current shared annual rent bill of £20k. There will be another 7-8k of capital repayments on the mortgage too, so your cash outlay is higher than this, but at least those repayments clear down the mortgage principal and in that respect they're like an investment.

Still, your £34k+ is much bigger than the £20k rent. Assuming the house price stays static, you are well out of pocket after a year. Even if the house price goes up by 2%, you lose that all in estate agent commission and solicitor fees when selling, and you are still out 14k+, plus whatever legal fees you had to pay when buying in the first place. So, this is an expensive business.

If the transaction costs get spread over a longer period (say 4-5 years), you are in better shape. When doing it myself, we agreed on a 4-year fixed mortgage as a minimum sensible commitment period - which also tied in nicely with a decent rate deal from Nationwide - but would probably have considered shorter if it wasn't for the stamp duty, selling costs and the fact you hardly pay off any equity through your mortgage payments in the first couple of years. Stamp of £10k per head doing a 2-way split of a 501k place or a 3-way split of a £751k place, compared to a token £2.5k payment on a £250k place, is a real killer.

I wasn't really going to comment more on this thread as most things that need to be raised already have been. But having gone through the process myself recently it will probably help you brainstorm the issues between yourselves and see if your plan is really workable or just a nice idea.