What is a Sole Proprietorship Co-Borrower Mortgage?

It’s a bit mouthful isn’t it? Often referred to as a JBSP Mortgage, a Joint Borrower Sole Proprietor Mortgage allows a parent (or family member) to contribute to their son or daughter’s mortgage without being a co-owner.

As a way for young people to move up the homeownership ladder, a joint borrower sole proprietorship mortgage ticks a lot of boxes. It gives the young buyer a sense of independence and ownership. The JBSP is also flexible, so the parents’ contributions can decrease over time until the son or daughter is able to cover all the mortgage payments on their own.

If you’re a youngster building your career and starting out on a modest salary, a JBSP mortgage could not only help you climb the homeownership ladder on your own, but allow you to purchase a larger home in a more desirable place. Without the additional help of a “joint borrower”, this could be totally unachievable.

What is the difference between a joint mortgage and a JBSP mortgage?

With a joint mortgage, you borrow money to buy a house with someone else, such as your partner, friend or relative. Both parties are responsible for the mortgage payments, so if one is unable to pay their share for whatever reason, the other must cover. Importantly, both have a legal right to ownership of the property.

With a JBSP mortgage, the other person (usually a parent) accepts joint responsibility for making the mortgage payments, but has no legal rights to the property.

Ownership is an important factor. These are true joint mortgages and JBSP offers allow both parents and children to join together to obtain a mortgage. However, with the JPSB, only the name of the son or daughter will appear on the deeds, meaning the parent can avoid any additional stamp duty. (Indeed, an additional stamp duty of 3% is levied on secondary properties).

What is the difference between a guarantee mortgage and a JBSP mortgage?

Unlike the JBSP where a parent agrees to contribute to the mortgage payments upfront; with a guarantor mortgage, the guarantor (parent) only becomes responsible for the debt if the son or daughter can no longer make the payments. They will be responsible for their son’s or daughter’s debts in arrears, but will have no ownership interest in the property.

Advantages and disadvantages of single proprietorship mortgages with a joint borrower

We’ve already looked at some of the benefits of JBSP mortgages, especially for first-time home buyers.

It is increasingly difficult for those looking to get on the property ladder to save enough of a deposit to buy a home. There are fewer 90 and 95% mortgages on offer in the current climate, so trying to find a deposit of 15-20% and more is quite a ask – especially considering that the average price of l property in the UK in 2020 is over £254,000 and in London the figure is over £472,000.

JBSP mortgages always require the buyer to pay a deposit, which varies from transaction to transaction. But the parent can participate in this deposit and then contribute to the monthly repayments. The higher salaries of parents or family members can be used to support lower incomes, without co-owning the property or having to pay additional stamp duty.

Case study

Here is an example of when a JBSP might be a suitable option for a first-time buyer.

Let’s say you want to buy your own home. You have a 10% down payment of £25,000 and have your eye on a flat worth £250,000. This means you need a mortgage of £225,000.

Your current salary is £30,000, so even if you go to a lender offering a maximum loan of 4.5 times your income, the maximum you could borrow would be £135,000 – still far from what you need .

However, if a second borrower (your parent) is added to the mortgage application and their regular salary is £60,000 per year, the combined income would be £90,000 per year. On the same 4.5 times salary basis, they could be considered to borrow up to £405,000. This means that you, the buyer and sole owner, have more flexibility in how much you can spend on your new home.

In the aftermath, the ideal scenario would be that you buy your house and the parent gradually reduces their financial contribution as your salary increases. This offers mortgage backers a simple, smooth exit strategy – at least that’s the theory anyway.

Joint Borrower Sole Proprietor Mortgage Lenders

One of the disadvantages of JBSP is that it is still a niche product, so there are not (yet) many lenders offering such products. This may change over time, but the choice is currently quite limited.

Lenders in this market are sometimes strict about their age criteria for those supporting the home buyer. Older parents may have a harder time getting approval from a lender.

JBSP Mortgage Risk

There is also a financial risk. If the owner does not meet the monthly payments, the non-owner party whose name appears on the mortgage is still responsible for the repayments.

Problems can also arise if the relationship between parent and child breaks down. It could be difficult for the illegal owner to get out of the mortgage contract. The son/daughter who is the rightful owner may not be able to take on the payments solo, which could mean a long and costly legal battle.

Income outlook

Just because the non-owner party has enough funds to contribute to the mortgage does not mean that the lender will automatically approve a JBSP mortgage. In most cases, the lender will want to be sure that the owner can, for the foreseeable future, make the repayments themselves. The owner will need to demonstrate a high probability that their income will grow steadily over time – if they fail to convince, the lender may reject the application.

Change of circumstances

Even in a short period of 5 years, a lot could change, which could impact the relevance of the JBSP agreement. For example, if you as the sole proprietor are now married or married and share the house with someone else. The other party may want to contribute to the mortgage and have their name on the deeds.

Alternatively, the non-owning part of the JBSP mortgage (the parent/family member) may wish to purchase a property themselves. A JBSP mortgage can hamper their ability to borrow what they need. They will need to convince the lender that they have sufficient funds to cover the costs of both mortgages.

These changing circumstances don’t necessarily create major problems, but they are things to be aware of.

How JBSP Mortgages Work

A JBSP Mortgage typically allows up to 4 people to be assessed for a single mortgage on a property (this number may vary by mortgage provider). The lender will take note of each party’s income but will only formally consider two incomes. The income of others can be used to constitute an additional financial guarantee.

  • JBSP mortgages are usually associated with parents and family members who support a young buyer, but with some lenders there are no restrictions on the relationship between the primary borrower and the supporting borrower (known as non-owner name)

  • As a general rule, the primary borrower must reside in the property and the supporting borrowers must not reside in the property

  • The lender will accept a gifted deposit from a close relative of the family if required

  • The maximum age at the end of a JBSP mortgage could be as high as 80, although some lenders set different/lower limits much closer to retirement age

  • Some lenders will accept applications from the self-employed and those with low credit scores or no credit history – suitability is assessed on a case-by-case basis. If you’re out of college or starting your first job and have been living at home so far, it’s entirely conceivable that you have little to no credit history. In such cases, adding someone with good credit can help get mortgage approval.

  • You are not limited on the type of residential property you wish to purchase. While public equity loan schemes such as Help with purchase, are specifically related to new construction, with a JBSP mortgage you can buy the house you want

  • In general, the rates offered on JBSP mortgages are generally no different from standard single applicant mortgages. Although there are a limited number of lenders offering these products at present, it is important to shop around and also compare with other options such as guarantor mortgages or first-time buyer mortgages

Take full responsibility

The concept behind JBSP mortgages is to help someone move up the property ladder – who would otherwise struggle with their current income and savings. But the financial assistance offered by the co-borrower (family member) is not intended to be indefinite. The legal owner is expected to assume responsibility for the mortgage payments on their home as their income increases.

So how does it work?

Imagine finding yourself in a situation where you are financially secure and feel you can comfortably make the repayments on your own. The next step is then to remortgage and thus release your parents/family members from the legal responsibility of your mortgage.

You can do this by using your current provider or by switching to another lender. Your mortgage application (with you as the owner and now sole mortgage holder) will only consider your income and expenses. An approval (or not as the case may be) will be based on this alone.

Even though your salary has increased significantly over the years since taking out the JBSP mortgage, it does not follow that your lender will automatically approve the remortgage. For example, in subsequent years, since the original JBSP mortgage was agreed, you may have increased your credit level significantly. High credit card balances and any additional loans could result in your mortgage application being denied.

While it is perfectly possible to conduct your own research into JBSP mortgages (and subsequent mortgages), you may find it helpful and reassuring to seek advice from an independent mortgage broker.

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