What Is A Tenants In Common Mortgage & How Do They Work?
Are you and your friends struggling to buy your own homes thanks to rising property prices and the cost of living crisis? It can be really hard to get on the property ladder these days, especially since many lenders will only offer mortgages of up to 4 to 4.5 times an applicant’s income with a standard mortgage.
In some parts of the UK, a mortgage of this size might be enough, but very often even one-bed apartments can be out of budget for many first-time buyers, who are finding themselves priced out of their chosen area.
If this all sounds far too familiar, we might have a solution. If you get along well with your friends, siblings or parents and you’re all on a mission to buy your first home, you could use a ‘tenants in common’ agreement to get on the property ladder together. Or, if you’re in a relationship, but let’s say you have a larger deposit and you want that to be reflected when you eventually sell the home, this could be for you too.
Let us explain…
In this guide
- What is ‘tenants in common’?
- What’s the difference between ‘joint tenants’ and ‘tenants in common’?
- Who is a tenants in common mortgage for?
- Can I sell my share of a house as a tenant in common?
- What happens when a tenant in common dies?
- How does being tenants in common affect inheritance tax?
- Can you change from joint tenants to tenants in common?
- Can you change from tenants in common to joint tenants?
- Tenants in common vs joint tenants: which should I pick?
What is ‘tenants in common’?
If you buy a property as ‘tenants in common’, you and the other buyers will each own an individual share of the property as co-owners. This means that when it comes to selling the property, the amount of equity you get out will reflect what you’ve contributed to the deposit and the mortgage over time. This allows co-owners to have different shares, for example one person could own 30% of the equity in the home while the other owns 70%.
What’s the difference between ‘joint tenants’ and ‘tenants in common’?
A tenants in common mortgage differs from a joint tenant mortgage because each co-owner’s share is separate and reflects what each person has contributed to the house deposit and repayments over the years.
Say, for example, you and a partner or friend were to get a joint tenant mortgage together. When it comes to selling the property you would both get 50% of the equity in the home, regardless of who put in what over the duration of the mortgage.
While with a tenants in common mortgage, the percentage you get of the equity would reflect how much you put into the deposit, and how much you’ve paid towards the monthly payments. So this could mean you would get 60% of the equity, and your partner or friend would get 40%.
Tenants in common
- How is ownership divided? You each own a percentage of the property. The percentages can be different amounts.
- Can I leave my share of the property to someone else? Yes, you can leave your share to someone who isn’t currently named on the property or mortgage.
- Do I need the other owners’ permission to sell the property? Yes, but you don’t need permission to sell your share of the property.
- Who is this type of ownership most suitable for? Friends, relatives or partners with very uneven contributions.
- How is ownership divided? Both owners own an equal share of the property, even if they’ve contributed different amounts.
- Can I leave my share of the property to someone else? No, your share will be passed onto the other owner(s) automatically.
- Do I need the other owners’ permission to sell the property? Yes, you do need permission from the other owners.
- Who is this type of ownership most suitable for? Partners or spouses.
Some couples choose to buy a house as tenants in common as it can offer extra protection in case they were to split up.
For example, let’s imagine a second-time buyer with a large deposit from the sale of their previous home wants to buy a house with their partner who’s a first-time buyer with no deposit.
In this case, tenants in common can allow the first-time buyer to get onto the property ladder and begin building equity while also protecting the second-time buyer’s much larger share.
Learn more: Here’s what you need to know if you’re a first-time buyer buying with a homeowner.
Who is a tenants in common mortgage for?
Tenants in common can also be suitable if you’d like to buy a house with your friends, siblings or parents. With property prices rising so quickly and many young people struggling to get on the ladder by themselves, we believe there’ll be a surge in this type of homeownership over the coming years.
Generation Home are leading the way with their version of a tenants in common mortgage, Dynamic Ownership.
Dynamic Ownership lets you and up to five friends or relatives buy a house together. You’ll combine your deposits and salaries, but unlike traditional joint mortgages, you each get an individual equity stake.
Your contributions will be tracked through a home agreement, so if you eventually sell the property, you’ll walk away with the same percentage that you put in, keeping everything fair and clear.
To qualify for Dynamic Ownership, you and your co-owners will need to save at least 5% deposit between you. If one person pays the full deposit, this won’t be a problem because their contribution will be reflected in the home agreement. You’ll also need to pass the lender’s mortgage affordability checks.
If you have a family member who wants to help you get your first home, but is uncomfortable about gifting money, you can buy with them using a type of Dynamic Ownership called Dynamic Income Boost.
Like our standard Income Boost, your loved one will add some or all of their income to your mortgage application. With a larger total income, you’ll be able to borrow more for a mortgage. But unlike our standard Income Boost, your relative will contribute to the monthly repayments from the get-go in return for equity in the home.
Plus, they don’t have to live in the property with you to qualify, and won’t be listed on the deeds. This means you won’t lose any first-time buyer stamp duty relief from buying with them.
When you sell the property, they will get their share of the equity back based on what they’ve contributed over the years, and how much the property value has changed.
Your family member can also add in a Deposit Loan. This is where they contribute to the house deposit, in return for an equity stake in the home, helping you access better mortgage rates or afford a larger property.
This is similar to our Deposit Boost, except their contribution is a loan, not a gift - your loved one will own a percentage of your property, or they’ll use an interest-free loan to bolster your house fund, which is repaid when the property is sold.
Can I sell my share of a house as a tenant in common?
Yes, you have the right to sell your percentage of the house as a tenant in common. In fact, one of the downsides of this agreement is that your co-owner could sell their share of the property without your permission. This means that you could have little control over who moves into the home or owns a share of it. However if you decide to sell the home entirely, all tenants must be in agreement.
You can also transfer your share to them in a transfer of equity, which you need to get consent from your mortgage lender to do.
In worst case scenarios you’ll have to apply to a court for an ‘order for sale’. This will force the sale of the entire property, which means each owner will have to leave the property.
When you first enter a tenants in common arrangement, it’s wise to have a solicitor draw up an agreement which outlines what needs to happen when one co-owner wishes to sell so everyone is on the same page.
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What happens when a tenant in common dies?
In the event of one of the co-owners dying, rather than being divided between the remaining owners, their share would form part of their estate along with any savings, investments and personal items.
If they have a will, their share along with the rest of their estate would be distributed based on the wishes outlined within the will.
If they don’t have a will, the estate will be distributed based on intestacy rules. These rules can be pretty complicated but they essentially determine which relatives will inherit the estate by default if it’s not laid out in the will.
This could complicate things for the remaining owners because they’ll have to accept that someone they didn’t originally agree to buy a property with now has a share in it.
If the remaining owners wish to sell their home, they have the right to do this. The beneficiaries of the person who passed away can’t initiate this process, even though they’ll own a share of the property.
It’s incredibly important to write a will when buying a home as tenants in common. By writing a will, you can ensure that in the unlikely event of your passing, your share of the property would be passed onto the correct person. At Tembo we partner with experienced will writers to make this as simple as possible for you.
How does being tenants in common affect inheritance tax?
Whether you own a property as joint tenants or tenants in common, your share can be subject to inheritance tax if you were to pass away. Inheritance tax is usually only due on estates over £325,000, but the law is complex and there are a number of exemptions and allowances.
If your share of the property goes to your spouse or civil partner when you pass away, no tax will be due.
But if you’re not married or in a civil partnership, the person who inherits the property may have to pay inheritance tax:
- For joint tenants, half of the property’s value will be added to the total value of the deceased person’s estate.
- For tenants in common, the value of the deceased person’s share will be added to the estate.
Can you change from joint tenants to tenants in common?
Yes, it is possible to change from joint tenants to tenants in common and vice versa. If you’d like to switch to tenants in common, this is known as ‘severing’ a joint tenancy. The process varies depending on where you live.
If you live in England or Wales, you’ll need to download a ‘form SEV’ from gov.uk before filling it in and sending it to HM Land Registry. You don’t need the permission of any other joint tenants to do this, but you do need to give them written notice beforehand. You can hire a legal professional to complete the form for you, but they’ll usually charge a fee for this.
If you live in Northern Ireland, you’ll need to complete a ‘transfer of whole’ form and submit it to Land & Property Services. You can download one of these forms from the Department of Finance website. It’s possible to sever a joint tenancy even if the other joint tenants don’t agree to it. One of the most common ways to do this involves taking out a mortgage on their share of the property and immediately repaying it, but we’d recommend speaking to a solicitor and mortgage broker before doing this.
If you live in Scotland, you’ll need to change the title deeds to the property. It’s usually best to use a solicitor for this because it can be quite a complicated process. The other joint tenants must agree to the change, too.
Can you change from tenants in common to joint tenants?
If you live in England and Wales, you and the other owner(s) will need to fill out a legal document called a trust deed. This is to confirm that you all would like to become joint tenants.
If your property’s title deed has any restrictions such as a restriction on selling the property unless certain conditions are met, you’ll need to apply to HM Land Registry to cancel these limitations. You can do this by completing a ‘form RX3’ and sending it to HM Land Registry.
If you live in Northern Ireland, you and the other owner(s) can become joint tenants by completing a ‘transfer of whole and or part’ form and sending it to Land & Property Services. This form can be downloaded from the Department of Finance.
If you live in Scotland, you’ll need to change the title deeds to the property. We’d recommend using a solicitor for this. The other joint tenants will need to agree to the change as well.
Tenants in common vs joint tenants: which should I pick?
If you’re trying to decide between a joint tenants or tenants in common mortgage, one of the main things to consider is who you’re buying with and how much you’re each putting in.
If you are buying with more than one person, or you’re planning on putting in different amounts towards the house deposit and monthly repayments, a tenants in common mortgage may be best. This way, everything would be kept fair and clear in terms of who owns what.
If you’re buying with your partner or spouse, then a joint tenant mortgage could be right for you as the equity will be shared equally between you. Though there are certain situations where you might be better off as tenants in common, for example if one buyer is putting down a much larger deposit than the other.
What are the advantages and disadvantages of tenants in common?
Get on the ladder sooner. Buying a house with your friends, partner or siblings could see you moving into a home you otherwise wouldn’t be able to afford. With several people named on the mortgage and several salaries contributing towards the repayments, lenders may give you a bigger loan.
You can each contribute different amounts. Since each owner’s individual equity is protected, each owner can contribute different amounts. This can be helpful if you earn different amounts, or one person wants to have more equity.
It can protect inheritances or family gifts. If you’ve received money towards your purchase from a family member or loved one, they might want to know that it is protected in the event that your relationship breaks down.
f you and your friends or siblings are currently renting, buying together can allow you to build up equity in a home you own. So down the line, you’ll have built up your own property wealth instead of paying your landlord’s mortgage.
Unlike some buying schemes, Dynamic Ownership, Dynamic Income Boost & Deposit Loan can be used by both first time and second time buyers. So you will still qualify if you’ve owned a home before, as long as you pass the affordability checks.
Everyone on the mortgage is liable for debt. This means that whilst not every co-owner needs to contribute to the monthly repayments, all applicants are jointly liable for the mortgage. So if you default, your fellow co-owners or parents will be legally responsible for the payments.
Your co-owners can sell their share to anyone and don’t need your express permission. This can feel unstable for some owners.
Each joint owner needs to pass affordability checks. All applicants will go through a mortgage affordability assessment to ensure they can afford the mortgage. This includes providing proof of income, identification and a credit check. If any co-owner doesn’t pass the checks, your mortgage application will be rejected.
Your loved one’s age impacts monthly repayments. Applicants’ maximum age at the end of the mortgage has to be typically between 75-85 years old. This means if your co-owner is over the age of 60, monthly repayments can become unaffordable.
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