FAQs - Legal, Ownership & Insurance

Legal agreement

What is the benefit of the free legal agreement?

When sharing a mortgage and a property, we believe it is important that the rights and responsibilities of each owner are set out in a legal agreement from the outset. Our agreement has been drawn up by a firm of London solicitors well experienced in property law.

The agreement covers key issues such as each owner's stake in the property and what happens if one of them wishes to move out. Whilst the agreement covers most eventualities, it is important to remember that this agreement is between the borrowers and it is entirely up to you what goes in it - thus, you can choose to remove or add clauses, but we would strongly recommend that you only do so after taking legal advice.

Please note: this legal agreement is offered without charge, however it is not necessary to have one in order to apply for a share to buy mortgage. In addition, if you do wish to use our legal agreement, while we will provide it for free, your solicitor may charge a fee for going through the agreement with you, but this would obviously be lower than if you had to draw up an agreement from scratch.

Alternatively, we can provide you with details of firms who can assist with the share to buy legal agreement. These are firms who are already familiar with the agreement and have built up experience in dealing with such cases. The key point is that they will include in their competitive standard legal fees not just the normal 'conveyancing' legal work involved in a house purchase, but also assistance with drawing up the share to buy legal agreement. We will provide you with contact details to obtain a quote when we send you detailed mortgage illustrations. See below for further details.

Do we have to use the legal agreement?

It is entirely optional.

Do we have to use your partner firm of solicitors and what fees are charged if we do?

You can use any firm and we will still provide you with a free copy of the legal agreement. However, they may charge you for going through the agreement, and sometimes these fees can be very high, whereas we will provide you with details of our partner firms who will assist you with the legal agreement as part of their standard fees, agreed from the outset. In addition, these firms will be expert in the legal agreement, as well as having considerable experience in other shared arrangements such as shared ownership with a housing association. When you apply we will provide you with contact details of partner solicitors so that they can give you a detailed quote of their fees. Please note that we may receive an introducer's fee of no more than £75 if you use one of our partner solicitor firms.

What if I want to move out?

If a co-owner in a share to buy mortgage wishes to move out while retaining their stake in the property, he or she may rent out their room. If the rent is below £4,250 per annum this will be tax free, under the 'Rent a Room' scheme. For further details on this scheme see the answer to the What is the 'Rent a Room' scheme? FAQ below.

In the event of one of the owners wishing to sell their stake in the property they must first offer their share to the remaining owner, at the current market valuation:

1. If the other owner wishes to buy, they apply to the lender to take over the share of the departing person and if they are successful, the person selling their share is removed from the mortgage.
2. If the remaining owner does not wish to purchase, or the lender will not increase the lending to enable them to do so, then the share may be offered on the open market (sharetobuy.com will eventually offer the facility to advertise existing shares for sale).
3. If no purchaser for the share can be found within a period of four months then the seller can require that the whole property is sold, each co-owner receiving their share of the remaining equity.

What is the 'Rent a Room' scheme?

The rent a Room a Room scheme contains special rules that usually apply when you rent out furnished accommodation in your own home. Under the scheme, a certain amount of rental income can be received tax-free. In the current tax year (6th April to 5th April) the limit is £4,250. Where the property is shared, as will be the case with share to buy, then the tax exemption will go to the person actually letting out the room.

When the level of rent exceeds the maximum allowed under the 'rent a room scheme', then you will have a choice between:

• Paying tax on the amount of rent over £4,250.
• Paying tax on the profit you make from letting out the room.

The profit is calculated by deducting allowable expenses from the rent received. The most common allowable expenses are:

• Gas and electricity
• Insurance premiums for buildings and contents
• Interest repayments on the mortgage (not repayments of capital)
• Maintenance and repair costs
• Water rates
• Council tax

If you wish to use the Rent a Room scheme all you have to do is tick the box on your tax return form to confirm that your rental income is £4,250 or less. Full details of the scheme together with worked examples can be found on the www.direct.gov.uk website: The Rent a Room scheme.

What if one of the owners stops paying their share of the mortgage and/or insurances?

One of the reasons we provide a free legal agreement is to cover such an eventuality. As under the terms of the mortgage loan, each person is responsible for paying the whole of the loan, should the other owner fail to do so. Our legal agreement provides a remedy whereby the other owner can require that person not paying to remedy the situation and should they fail to comply within a period of two months from the onset of the default, can force them to sell their share. To minimise the chances of this happening we strongly recommend that each owner takes out an Accident, Sickness and Unemployment policy to cover their mortgage repayments.

What if one of the owners absconds?

If one of the owners deliberately goes into default by absenting themselves without making arrangements to maintain their share of the mortgage - subject to a time-limit of two months - the remaining owner can rent the absent party's space (paying his/her share of the mortgage and retaining any profit for the aggravation) or purchase or sell his/her share of the property at the current market rate. Any residual monies, after deduction of reasonable expenses (e.g. legal fees), will be placed, where possible, in the bank account of the absconder.

What happens if one of the owners sells their share?

At the outset the percentage share of the property owned by each applicant is set out, and is based on the combination of deposit and mortgage borrowing contributed by each. When a share is sold then their share of the mortgage is repaid to be replaced by that of the person buying into the property. They will then have their original deposit, together with their share of any growth in the value of the property.

Do the present owners have any say in deciding who can enter the property as a new lodger or new co-owner?

It is likely that new lodgers or purchasers of a share in the property will be found among existing friends or colleagues of the current owners. Should a new lodger or purchaser be proposed who is not acceptable to those remaining, they should make their objections known. First, it is very unlikely that a new lodger or purchaser would want to share a home where he/she is not welcome. Secondly, the remaining owner can always propose a more acceptable candidate.

What happens if an owner wishes a third party to reside at the property?

The share to buy Legal Agreement states that:

'No person other than the owners may stay at the property for more than two consecutive weeks nor for more than four weeks in any twelve month period unless agreed in advance by all owners. If the continuance of a temporary residence of a visitor becomes unacceptable then the owner who has not invited the visitor may insist that the visitor be asked to leave and the owner who invited the visitor shall arrange for the visitor to leave the property as soon as is reasonably possible.'

Ownership

What is Joint Ownership?

Joint Ownership in the context of residential property is quite simply where more than one person owns a property together. If the joint ownership of the property involves a mortgage, then the mortgage will be on the basis of 'joint and several liability'. That is, all parties to the mortgage are jointly and severally liable for repaying all of the mortgage. Click here for more information on joint ownership.

What if we have varying salaries and/or deposits?

Under the terms of the mortgage contract with the lender you will each be individually responsible for the whole of the mortgage. However, our legal agreement will allow you to specify how much of the loan you will be responsible for repaying.

Therefore, as long as you are comfortable with the level of repayments implied, it is a matter of agreement between the borrowers how much each contributes towards the mortgage. The agreed percentage of the mortgage together with their deposit will dictate the percentage which each owner has in the property. Again, this will be set out from the outset in the share to buy legal agreement. Click here for a detailed worked example with varying deposits.

How should we divide costs incurred in buying and selling the property?

When buying the property with your share to buy mortgage, you will incur ancillary costs, such as stamp duty and legal fees. It is up to you how these costs are divided, but given that these costs can be significant (for example, stamp duty is applied at 3% of the purchase price on properties over £250,000) we would suggest that you divide these costs according to each applicant's equity share in the property. If you sold the property, this would be covered by the share to buy legal agreement which provides that the costs involved in selling the property, such as legal fees and estate agent's fees, are divided according to each owner's equity stake in the property.

Am I guaranteed to gain by buying a property with share to buy?

There can be no guarantee that you will gain financially by buying a property, whether through a share to buy mortgage or otherwise. The value of a property is ultimately dictated by what someone is willing to pay for it and whilst property has proven to be a wise investment over the longer term, no one can guarantee that this will always be so.

What if house prices fall?

In the event that house prices fall, the first thing to remember is that the primary reason to buy a property is to have somewhere to live, in an area that you like, and this would not be affected. When house prices have fallen in the past, this has generally proved to be a temporary situation; although obviously local areas can be affected by local conditions, such as the closure of an industry which is the only employer in a small town.

It is often quoted that the three most important things to consider when buying a property are - location, location, location! You will only be affected by a temporary downturn in property prices if you sell during this period; in which case, after repayment of the outstanding mortgage you may receive back less than you originally put down as a deposit. Indeed, if the fall in property prices had been to such an extent that the sale of the property did not clear the outstanding mortgage debt a situation known as 'negative equity' would prevail; should the property be sold in these circumstances, you would have to find the extra funds to redeem the mortgage. We would therefore recommend that where possible, you retain your interest in a share to buy property, by renting your share until such time as property prices recover.

Insurance

Do I need Life, Critical Illness, Accident, Sickness and Unemployment insurance as part of share to buy?

A share to buy mortgage is a debt. It is also one which is shared. We therefore recommend that in the interests of all borrowers arrangements should be in place to enable an owner to meet their obligations should fate make it difficult or impossible for them to do so. The share to buy legal agreement therefore specifies that each owner must put in place the following insurances to ensure the misfortune of one does not result in misfortune for the other:

• Life Insurance: should a co-owner die, the life insurance is designed to pay a sum of money equivalent to the outstanding share of the mortgage of the person who has died. This ensures that the responsibility for repaying their share of the mortgage does not fall on the surviving owner. This can be summed up as 'it's your debt, if you go, take it with you'.
• Critical Illness: this is also designed to pay a sum equivalent to the outstanding share of the mortgage of the person insured. This is payable should you be diagnosed as suffering from a 'critical illness'. The insurance company sets out a list of those conditions covered and these may vary slightly from company to company. The reason for this policy is that if you were unfortunate enough to be diagnosed as suffering from a critical illness, this would be an extremely stressful experience and one where you would not want to add to the situation by having to worry about your mortgage.
• Accident, Sickness and Unemployment Cover: this insurance, which is also known as Mortgage Payment Protection Insurance, pays an agreed monthly amount, should you lose your job through redundancy, or be unable to work because of illness or accident. The payments will usually commence thirty days after redundancy or onset of illness/accident and are generally maintained for up to a year or until you have found other employment or are well enough to return to work, whichever happens sooner.

Are these insurances compulsory?

No, these insurances are not compulsory for a share to buy mortgage. However, both the Accident, Sickness and Unemployment cover and the Life and Critical Illness cover are standard requirements of the share to buy legal agreement between owners. This is for the mutual benefit of both owners, providing the reassurance that if one of them was to suffer a mishap that prevented them from meeting their mortgage obligations (e.g. redundancy, serious illness or death), then where possible, the insurer - rather than the other owner - would meet the debt.

While it is both common sense and a standard condition of the legal agreement for you to have these insurances in place, the legal agreement is an agreement between the owners. Therefore, if the owners agreed not to put in place one or both of these insurances, they could amend the agreement to this effect. It is ultimately entirely up to you, the owners, what goes in the legal agreement, but we suggest that you only amend the legal agreement after taking legal advice.

Do I have to apply for these insurances through Share to buy?

No. Whilst Share to buy offers you the opportunity to apply for insurances that meet the requirements of the share to buy legal agreement, you are free to arrange your own insurances if you would prefer to do so. Please note that we give no advice in respect of whether the insurance arrangements provided by Share to buy are suitable for your own personal circumstances.

What if one of the applicants were unable to obtain life and critical illness cover?

If an applicant were unable to obtain life and critical illness cover, it would be up to the other applicant to decide if they would be prepared to proceed. It should be borne in mind that if a person is unable to obtain cover it is likely to mean that they have a very high likelihood of dying or suffering a critical illness within the term of the mortgage.

Are there any circumstances in which Life and Critical Illness cover would not clear the mortgage in the event of a claim?

Such circumstances could be:

• Where questions on the application form were not honestly answered;
• When the loan has been increased due to arrears;
• Where the lending has been increased with a Homeowner's Loan and the Life and Critical Illness cover has not been increased correspondingly;
• Where the critical illness is not specifically covered under the terms of the policy.