It is extremely difficult for Irish people to get on the property ladder and that is especially the case if you are a single person trying to go it alone.
The Residential Property Price Index as of August 2022 revealed that prices increased 12.2% year on year showing next to little slowdown in the skyrocketing house prices in Ireland.
This has forced many to come up with creative and new ways of buying their first home – one such method is to get a mortgage with a friend, but is it a good idea? In this blog post, I will go over some of the issues you will need to be aware of and tackle before taking this step.
Not every bank may want to take on the risk
The more people you want to add to the mortgage, the more difficult it may be to get mortgage approval. The market for prospective Irish homebuyers is getting smaller, with banks such as KBC and Ulster Bank discontinuing operations in the country.
Personally, I know of three friends who decided to go this route of getting a mortgage together. They approached a couple of lenders, and the lenders weren’t keen on giving out approval for a mortgage with more than two people.
It may seem a bit counterintuitive that the combined buying power of three people was considered riskier than lending to two people by the banks, but it appears a lot of banks won’t touch unusual mortgage applications.
Is the reason to save on rent in the short term?
If the sole reason you are buying a house with your friend is to save on rental expenses over a short-term period of 5 years, then it is important to work out exactly how much you will actually save by doing this before you commit.
Remember, when you start repaying the mortgage initially, most of your mortgage repayment be paying the interest charges in the first couple of years.
Depending on your mortgage interest rate, and the term it could be anywhere from 7-14 years before you reach the tipping point where more than 50% of your mortgage repayment pays down the principal of the loan.
You will also have costs such as insurance, legal, stamp duty (1%), local property tax, and the cost of furnishing the property to factor in also. On the plus side if the property you are buying has a spare room, you could also make additional income from the rent a room scheme.
What is the exit strategy?
Even though you are most likely buying a property with a close friend of yours, you will have different plans for your life, unlike a couple would.
It will be difficult to agree on when is the right time to sell for both parties.
Whether it is a formal or informal agreement, all the parties involved in the transaction should plan for all the different eventualities that may arise in the future that could cause friction and disputes.
This makes sure there is a plan of action that everyone has agreed on that can guide you if some unforeseen circumstances arise.
Difficulty in getting second mortgage
Have you thought out your long-term strategy? If you plan on taking on another mortgage in the years after buying a home with your friend, the bank will calculate your repayment capacity based on you also being able to cover 100% of the mortgage with your friend as part of the approval process.
This could therefore hamper your ability to buy your dream home in future years if the property you bought with your friend is not sold and the mortgage cleared firstly.
Final Thoughts
Even though the points I have gone through in this blog post have aired on the side of caution, there are also benefits to entering a mortgage arrangement with a friend.
Such as how much easier it is to get a deposit together, as well as the opportunity to buy a much better property with the increased lending limits two salaries combined can bring.
So make sure to weigh up all these pros and cons before signing on the dotted line.
Disclaimer: This blog post is for informational and educational purposes only and should not be construed as financial advice.
