"Joint Borrower Sole Proprietor" mortgages and living together agreements
Simon Burge, a family law expert, takes a look at the use of a "living together agreement" in connection with a joint borrower mortgage for an unmarried couple, where only one of them is to own the property.
Sometimes an unmarried couple say that it suits them for one of them alone to own their new home. Take Donald and Hilary who have found a property to buy as their first home together for £400,000. Hilary already owns a property worth £200,000; it is now rented out and she wants to keep it.
Donald and Hilary realise that if they buy the home together then the higher rates of stamp duty land tax (SDLT) apply. The SDLT would be £22,000. Donald however has never owned a property and if he buys alone would be entitled to first time buyers' relief from SDLT. The SDLT would then be £5,000.
It might be practical for Donald alone to own the new property where all of the capital is put in by Donald and if Hilary does not mind that she has no share in the ownership of the new property. In this case Donald needs a mortgage and affordability might dictate that both Donald and Hilary are liable on the mortgage.
Most lenders would require both individuals to be owners of the property. Some however offer "Joint Borrower Sole Proprietor" mortgages. This would mean that both Donald and Hilary are liable on the mortgage, but only Donald owns the property. This can work from a lender's point of view where Hilary is genuinely joining in for affordability, but with no interest in the proceeds of sale (similar to an old style guarantor mortgage).
Hilary is content not to have a share in the property and is willing to pay a share of the household expenses, including the mortgage, whilst the relationship lasts and they are living together. She points out that she already has another property, so she has some protection if she and Donald ever break up. Donald and Hilary might benefit from having a living together agreement which could protect her to some extent (also called a cohabitation contract).
A living together agreement
Hilary runs the risk of continuing liability on a mortgage of a property she has no share in long after the relationship has ended. There is a risk of the Bank claiming the mortgage debt from her; also the debt would be taken into account should she seek to borrow. A living together agreement could include provisions like the following:
While their relationship lasts:
- She can live in the house, even though she has no share in it.
- How household expenses, including the mortgage repayments and insurance, are to be met between them.
- Any mortgage overpayments should be funded entirely by him.
- Any improvements to the property should be funded entirely by him.
If the relationship ends:
- He is obliged to meet all of the ongoing mortgage repayments.
- He is to indemnify her from all liability under the mortgage.
- On her request he is to use his best endeavours to remortgage the property or procure her release from the mortgage within a set period.
- On her request he is to use his best endeavours to sell the property and to discharge the mortgage, he being entitled to all of the net sale proceeds.
- What will happen to other assets, whether owned jointly or by one of the parties.
Hilary would need careful advice, not just as to the inherent risks of her position and the terms of the living together agreement but also the problems of enforceability should they break up. Provisions should be included in the agreement making clear which terms are legally enforceable (including the terms about remortgaging and selling).
Donald might struggle to re-mortgage using his income alone and the lender could refuse to release Hilary from her mortgage obligations. Alternatively, he might be reluctant to sell, preferring to keep the property as a home for himself.
If Hilary was claiming that she had a beneficial interest in the property she would be able to invoke the Trusts of Land and Appointment of Trustees Act 1996 and apply to the County Court for a Declaration and/or an Order for Sale.
However, because she has no such interest she will have to rely on a claim for damages for breach of contract or insist on 'specific performance' of the contract. This makes Hilary's legal position quite difficult and so she would need to think very carefully before committing herself to a sole proprietor joint borrower type arrangement.