Worked Example

The following is a fully worked example of a share to buy mortgage, which you are recommended to read through step-by-step.

Mark, Ed and Chris - the options

They are three young professionals earning, for convenience sake, £24k each. Their options for putting a roof over their head are:

• They can rent a flat together; a three bed flat costs them £500 a month each - great news for their landlord as this goes entirely towards paying his mortgage, but 'dead money' as far as the flatmates are concerned.
• They can buy individually - the most someone on £24k might borrow is around £120,000 which, even with a deposit, may not be enough to buy a flat they would want to live in and the repayments could entail a significant stretch of their income.
• They can apply for a share to buy mortgage together.

The following is a worked example of the last option, where Mark, Ed and Chris apply for a share to buy mortgage.

Step 1: Initial Enquiry

• With a salary of £24k each, the basic calculator tells Mark that he and his flatmates could borrow between £216,000 and £360,000, depending on their combined credit score. This is because our share to buy mortgages can take into account up to four salaries. With their 10% deposit the friends can buy a property for £240,000 (schemes accepting a 5% or zero deposit are available when buying with friends, though rates might be higher and choices more restricted).
• They therefore request a mortgage illustration from sharetobuy.com to provide a more accurate assessment of how much the group can borrow, and importantly, to find out how much it would cost to borrow that on a monthly repayment basis.

Step 2: Agreement in Principle

• Mark, Chris and Ed now know what price range they can potentially afford and roughly how much it will cost them each month. They find that there are 3-bed properties (some with two bathrooms!) in their locality and price range.
• They would like to make an offer when they have chosen a property, but want to do so knowing that they have a mortgage in place so that the vendor has the confidence to accept their offer and take the property off the market. For this, they need an agreement in principle from the lender that they would definitely lend this amount to them, subject to valuation. They can obtain an agreement in principle from our website.
• On passing the agreement in principle, they are able to make an offer on the property. When that offer is accepted they can apply in full.

The key steps of applying for the mortgage and buying the house are explained in the house buying process.

After three years...

The group decide they want to go their separate ways. They put the house up for sale. For the purposes of this example, in those three years, property prices have risen by just over 2% per year. Therefore, their house is now worth around £255,000. To summarise the division of the sale proceeds:

• Each co-owner gains a third of the £15,000 profit - £5,000 each.
• Plus, each co-owner receives back their deposit.
• In addition, if they had taken out the share to buy mortgage on a capital repayment basis (the interest only option is generally available), the outstanding debt will have reduced over the three years, which would result in them each receiving an additional sum in the region of several thousand pounds that would otherwise have been spent on rent.

Important note:

Property prices can fall as well as rise - see FAQ on 'falling house prices'.

'What ifs'

The above case study is simplified for convenience sake, so that you can understand a straightforward illustration. We now consider additional scenarios that might arise in practice. There are three principal 'what ifs':

1. What if the applicants have uneven salaries and deposits?
2. What if one of the owners wants to move out?
3. What if one of the owners dies or loses their job?

What if the applicants have uneven salaries and deposits?

The ownership of the property, which will be recorded on the front of the free share to buy legal agreement, is determined by two criteria. First, the amount of deposit that each contributes, and secondly, the percentage of the mortgage that each applicant wishes to be responsible for.

The percentage of the mortgage that each person takes on does not have to be related directly to their salary, because from the lender's perspective all borrowers are jointly and severally responsible for the mortgage payments. It is therefore up to you, the borrowers, how you proportion the mortgage and the repayments between yourselves - but once decided this will be recorded on the share to buy legal agreement.

There are two options to consider where there are uneven deposits, either:

• You own the property with uneven shares, or
• You own the property equally by adjusting each person's share in the mortgage in relation to their share in the deposit to provide equal shares in the property as a whole

Option 1: owning the property with uneven deposits and uneven shares

In this case, the share to buy legal agreement would record the uneven shares in the deposit and equal shares in the mortgage. The property price is £240,000. With a £24k deposit this equates to a mortgage of £216,000. In this example Mark is putting up the entire £24k deposit. Thus, stakes in the deposit are as follows:

• Chris: 0
• Ed: 0
• Mark: £24k

They wish to have equal shares in the mortgage. These are as follows:

• Chris: £72,000
• Ed: £72,000
• Mark: £72,000

Therefore, each month, each borrower pays the same monthly contribution to the mortgage. In terms of shares in the property, Chris and Ed have shares equating to 30% (£240,000 divided by £72,000) whilst Mark owns the remaining 40% comprising his deposit and his share in the mortgage. When the property is sold, Mark receives his deposit back plus any growth in its value and after the outstanding mortgage balance is paid off, the remaining sum is divided equally between the three owners.

Option 2: owning the property with uneven deposits but equal shares in the property as a whole

In this example, the three owners agree uneven shares in the mortgage to balance out the uneven shares in the deposit so that overall they own the property equally. The property price is £240,000. With a £24k deposit this equates to a mortgage of £216,000. Again, in this example Mark is putting up the entire £24k deposit. Thus, stakes in the deposit are as follows:

• Chris: 0
• Ed: 0
• Mark: £24k

They wish to own the property in third shares, i.e., equally. Thus, they each have a share worth £80,000 at the outset. These are as follows:

• Chris: £80,000 - comprising £0 deposit and £80k share in the mortgage
• Ed: £80,000 - comprising £0 deposit and £80k share in the mortgage
• Mark: £80,000 - comprising £24k deposit and £56k share in the mortgage.

Thus, their shares in the mortgage are:

• Chris - (£80k/£216k) = 37%
• Ed - (£80k/£216k) = 37%
• Mark - (£56k/£216k) = 26%

Therefore, each month they pay this percentage of the monthly mortgage. Chris and Ed pay more in order to make up for them putting down less on the deposit.

A reasonable question: 'after three years, how do we work out what each person's share is?' You calculate each person's share by deducting their share of the current mortgage balance from the current market value of their share. After three years of growth at an assumed rate of 2% a year, the property is now worth £255,000 so each person gains £5k.

Thus, each person's share is now worth £85,000. In order to work out each person's gain, it is necessary to know the new mortgage balance. Assuming it is a capital repayment mortgage, they will have been reducing the balance each month. It is impossible to know what this figure would be as it would depend on a range of factors, such as rate and term, but we assume that after three years the balance is reduced by £10,000 to £206,000.

To work out each person's share in the balance after three years, you use the mortgage shares NOT the equity shares. Thus, each person's share at that point is:

• Chris - 37% of £206,000 or £76,220
• Ed - 37% of £206,000 or £76,220
• Mark - 26% of £206,000 or £53,560

Finally, each person's gain is the value of their share at the current market value in three years (£85k) minus their mortgage balance, giving the following cash sums left to each on sale of the whole property after three years:

• Chris: (£85k - £76,220) = £8,780
• Ed: (£85k - £76,220) = £8,780
• Mark: (£85k - £53,560) = £31,440

Important point: surely, Mark's gain at this stage would be the same as the others plus his deposit of £24,000? No. By paying slightly more on the mortgage each month, the other two are also paying off slightly more capital. This is not unfair because Chris and Ed have had to pay more interest to achieve that gain, but this way it is possible to exit after three years with the 'deposit difference' maintained yet all owners feeling like they have been party to a fair deal.

Of course, while we believe this method is a fair way of evening out the overall ownership where there are different deposits, this method is complex. It should be stressed that your solicitor will write both your mortgages shares and equity shares on to the legal agreement so that will make it easier to calculate the above figures and it is not as if you will be doing them every day! Ultimately, you should take legal advice on the best way to achieve a fair agreement on ownership of the property.

What if one of the owners wants to move out?

One of the most commonly asked questions about share to buy is 'what happens if someone wants to move out'? This is an important question. In fact, the whole point of share to buy is that it is a package and not just a mortgage, and it includes a FREE legal agreement to be signed when you move in, detailing exactly what happens in given situations.

Thus, in the worked example, if Ed has to move out after a year to work in another city. He can:

• Keep his share in the mortgage and rent out the room to cover his repayments, while he rents a room in the new city where he is working - under the 'Rent a room' scheme rooms can be rented out in a home tax free up to £4,250 a year (see the 'Rent a Room' scheme FAQ for further information).
• If Ed doesn't want to keep his share, under the terms of the Share to Buy Legal Agreement, he is required first of all to offer his share for sale to the other owners, Mark and Chris. If one or both of them are willing and able to buy Ed's share, they can buy it (and if they want, they can also rent out his room under the 'Rent a Room' scheme).
• If Mark or Chris can't afford his share or don't want to buy it, Ed can offer the share externally to an outside buyer who would effectively become a new flatmate and a new party to the share to buy mortgage.
• Finally, if no-one is able to buy the remaining share and Ed doesn't want to keep it and rent it out, the whole house is put up for sale.

See FAQs for more details, including 'what say do the present owners have in deciding who can enter the property as a new lodger or owner?'.

What if one of the owners loses their job or dies?

If they are made redundant, the individual claims on the Accident, Sickness and Unemployment they should hold as required by the Share to Buy Legal Agreement. This insurance will cover their monthly mortgage repayments until they find further employment or twelve months have elapsed. If they find new employment, all is well. If it is clear that they will not be able to find suitable employment, then they would seek to either rent or sell their share of the property.

If they die or suffer a critical illness, a claim is made against the individual's Life and Critical Illness policy. This insurance will pay a lump sum equivalent to the individual's outstanding mortgage debt. Should they have died their share in the property will then be owned by their estate. The surviving owners will therefore not have to support the deceased person's share of the mortgage and will deal with their estate in the same way as they would have done with the deceased member.

Due to the importance of protecting all parties to the joint mortgage, the Share to Buy Legal Agreement requires each applicant to have mortgage protection insurance (covering Accident, Sickness and Unemployment) and Life and Critical Illness cover. These are not compulsory because the legal agreement is between you, the borrowers, and therefore it is ultimately your choice as to what goes into the agreement - but we would strongly suggest that you consider what would happen if one of you suffered misfortune and no cover was in place, and that you only amend the legal agreement only after taking legal advice.