Group mortgages can help first-time buyers onto the property ladder but it is not an arrangement that should be entered into lightly, writes Áine Flynn.
Increasingly, young singles are pooling resources to get a toe on the property ladder, as house prices remain firmly out of reach for most lone first-time buyers.
Mr Michael Dowling, Independent Mortgage Advisors Federation (IMAF) president, says "buddy mortgages" - where three or four friends come together to secure a share in a residential property - have increased significantly.
"Four or five years ago it was practically non-existent," he says. "We get at least one call a week asking about the feasibility of buying a house in this fashion."
EBS residential mortgage business manager Mr Glenn Calverley also says he has seen an increase in mortgage applications with more than two applicants attached, all of whom tend to be very young, trying to "cross the hurdle of affordability".
"Getting a deposit together is the most difficult part when thinking of buying a house," he says. "This is one way of doing it but we strongly advise people to get legal advice as the contract becomes more complex when there are more than two people involved."
Mr Dowling of the IMAF stresses that people need to be very cautious before making any commitment. "Experience has shown me that it can be fraught with difficulty," he says, outlining that it is predominantly single people who enter into these group schemes.
Circumstances change, he warns. One party may want to set up house with a new partner or may have to relocate due to unforeseen work commitments. And bonds of friendship can sever. When there is a lack of relation by blood or marriage, the old adage that blood is thicker than water can ring true.
Therefore, a group strategy needs to be set down in a legal agreement to cover all possible outcomes and to take account of how much each party is contributing in terms of the deposit and the monthly repayments. It is important to remember that, in doing so, you are not showing a lack of confidence in the friendship or the arrangement but merely protecting everyone's interest should the unexpected occur.
Forming part of a group, a first-time buyer automatically establishes a credit rating, which may assist them in securing another mortgage in the future if the credit record remains positive. If, however, the group mortgage goes into arrears, everyone's credit record will be tainted - even the participants who have paid on time. If a borrower doesn't make a payment, the legal agreement should outline a plan of action for the other borrowers.
Mr Dowling is not convinced that banks view a mortgage applicant's financial position more favourably if they have been part of a successful group mortgage arrangement. "It would be equally as beneficial to see that someone had the ability to pay rent for a year," he says.
There can be an automatic assumption on the borrower's behalf that a bank will lend more to a group than to an individual or couple. Mr Dowling dismisses this, saying that irrespective of the number of applicants "there is a maximum percentage that the bank will lend relative to the purchase price".
Most applications including two people will be offered between two-and-a-half times and four times the applicants' combined salaries. When there is a small group of applicants, it is generally accepted that higher limits are placed on the multiples of salaries offered if there is a third or fourth party.
AIB marketing manager Mr Turlough Crowe confirms that the loan-to-value ratios would be greater in a group mortgage.
"If there were four people in a mortgage they probably would not receive 90 per cent finance. We would need more equity from each to make it float."
Mr Crowe adds that, although the bank is not averse to the idea of a group mortgage amongst friends, it is "not the most attractive proposition".
"The greater the number of applicants involved, the more concerned I'd be because the risk might be deemed to be a little bit higher," he says.
An arrangement like this is not expected to last forever by either the borrower or the lender. It is often seen as a short- to medium-term commitment made by young people who will eventually separate and purchase houses on their own or in a couple.
Mr Joe Pitcher, an independent financial adviser, says the arrangement is "a shrewd enough way of getting a foot on the property ladder. The initial outlay is reduced for each participant and the defined risk is reduced to a third or a quarter of the property."
Although Mr Pitcher says group mortgages "can be a good idea" and "can help spread the risk", he is somewhat sceptical about the monetary benefit attached.
"If there is a group of people, the benefit of it stops being relevant," he says. "You have to remember that you are only going to experience a third or a quarter of the up-side as well as only being burdened by the same proportion of the downside, if there is one."
Looking in, a collective investment in bricks and mortar looks like a sure-fire success story in the making and an easy answer to escaping the rental trap. In reality, it is something that should not be entered into lightly and requires serious forward planning.
It would be a harsh lesson to learn to wake up one day with a bad taste in your mouth and realise that you were naïve to have such faith in a shared mortgage between friends.
