How to Buy Someone Out of a Mortgage
Buying out a co-owner can be complex, but with careful planning and expert advice, you can take back control of your asset(s).
Whether you're facing a divorce, a business partnership dissolution, or simply want sole ownership of a property, you'll face a flurry of legal processes and negotiations. However, SAM is here to help.
The four key steps in a mortgage buyout are valuation, negotiation, mortgage application, and the transfer of equity.
What happens in a mortgage buyout?
A mortgage buy-out is a financial transaction where one homeowner purchases the other's share of the property. This often occurs in situations like divorce, separation, or a change in financial circumstances.
Key steps in a mortgage buyout
Valuation:
A professional valuation is essential to determine the property's current market value and the fair value of each owner's share. For example, if a property is valued at £300,000 and the outstanding mortgage is £150,000, the total equity in the property is £150,000.Negotiation:
The parties involved should negotiate the buy-out terms, including the purchase price, payment terms, and any additional conditions. For instance, they might calculate and agree on a beneficial interest split, a fixed purchase price, or a price based on a future valuation.Mortgage Application:
The buying-out party needs to gain lender consent for the buyout and may need to remortgage to cover the purchase price of the other owner's share. This process can take several weeks, depending on the lender's processing time and the buyer's financial situation. We go into this in more detail below.Transfer of Equity:
Once the mortgage is approved, a legal process is initiated to transfer ownership to the buying-out party. This involves updating the property title deeds and mortgage documents. The legal process can take several weeks or even months, depending on the complexity of the situation and the efficiency of the legal professionals involved. SAM can complete a straightforward transfer in 3-6 weeks.
How long does it take?
The duration of a mortgage buy-out can vary significantly, but it typically takes several months. Factors influencing the timeline include:
The situation's complexity:
Legal and financial complexities, such as disputes over property valuation or division of assets, can extend the process.Valuation timelines:
Obtaining property valuations and surveys can take several weeks, depending on the availability of valuers and surveyors.Mortgage application processing
The time it takes for lenders to process mortgage applications can vary, but it usually takes several weeks.Legal procedures:
Transferring ownership and updating legal documents can take several weeks or even months, depending on the complexity of the situation and the efficiency of the legal professionals involved.
For example, a straightforward buy-out with no significant legal or financial complications might take around 3-4 months. However, a more complex situation, such as a contested divorce, could take much longer.
Our brokers will present the best options available to you, for any type of mortgage, including:
- First-time buyers, home movers and buy-to-lets;
- Employed; self-employed or director mortages;
- Mortgages for non-UK residents or non-UK citizens;
- Bridging loans;
- Bad credit mortgages;
- Guarantor mortgages;
- Joint borrower, sole proprietor mortgages; and
- Absolute, Possessory, Good, or Qualified Title.
How to remortgage to buy someone out of a house
Determine share of equity
As joint tenants, you share the whole property equally, so if there are two of you, you each have a 50% share. If there are three joint tenants, you each own 33.33%. Four, you own 25%, etc.
If you are tenants in common and own unequal shares, these should be set out in a properly drafted Deed of Trust, which is often registered on the title deeds and the Land Registry. If you disagree on how the equity should be divided, get in touch, we can help. We offer a free 15-minute consultation on property disputes.
Once their percentage share has been determined, use our calculator to calculate their share of the market value.
Book a FREE 15-minute meeting* with a property dispute specialist who will listen to your issue and suggest ways forward, including the costs, with no obligation to use our services after the free meeting.
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- How to sell where one person doesn't want to.
- Mediation and Settlement Agreements.
- Applications to court, including Declaratory Orders, Regulatory Orders, Occupational Rent.
Get a new mortgage offer
If you've got the cash to buy out the other owner's equity and take their name off the title, you'll just need a lender to grant you sole responsibility over the outstanding debt. If your lender isn't happy with you handling the mortgage payments alone, you might need to remortgage with a different mortgage product.
If you need to borrow more to fund the buyout, you may find it harder to get a mortgage to cover the whole amount in your sole name.
If you need to borrow more than the lender is happy with, based on your sole income, you can ask a guarantor to guarantee your mortgage or opt for a joint borrower sole proprietor mortgage.
It means that the person helping you out will be liable for your repayments if you fail to pay. You can't go forward with the transfer until the new mortgage is in place.
Buy out their share with a transfer of equity
Once the funding is in place, you pay to buy out the share with a transfer of equity. The exiting owner signs over their share of legal and beneficial interest to you, transferring the ownership of their share of the equity, and your solicitor will send their solicitor the agreed funds (which may involve drawing down the funds from the new mortgage lender).
Example
Imagine you own a house with a friend. The property is valued at £300,000, and the outstanding mortgage is £150,000. You want to buy out your friend's share.
- Determine Equity: The equity in the property is £150,000 (£300,000 - £150,000).
- Remortgage: You apply for a new mortgage of £225,000 to cover the outstanding mortgage (£150,000) and buy out your friend's share (£75,000). Your personal mortgage liability increases from £75,000 to £225,000 so you may need another person on the mortgage to satisfy the lender's requirements.
- Transfer of Equity: Once the new mortgage is approved, the legal process is initiated to transfer ownership to you.
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How to buy out your co-owner with equity release
Equity release may be a good option if you have little to no mortgage and are retired or close to retirement. It's a financial product that allows homeowners aged 55 or over to release some of the wealth tied up in their property. It can be used to raise funds to buy out a co-owner's share.
For example you and your spouse each own half of a property worth £300,000 and you have no mortgage. You need £150,000 to buy out their share, and you own £150,000 worth of equity already.
You have £100,000 available from the sale of a separate asset. If you use an equity release product to free up £50,000 of your £150,000
You'll then own £250,000 equity in the property and the other £50,000 belongs to the equity release provider.
Some equity release deals involve an interest-only monthly payment, where you'll pay the interest each month on the £50,000 loan, and £50,000 will be deducted from the proceeds of the sale of the property when you die or move into long-term care.
Other products 'roll up' the interest, meaning the total amount which will be deducted to repay the loan plus interest can increase to quite a high figure, sometimes leaving very little left in your estate to pay for end-of-life care or bequeath to your loved ones.
It's important to note that you must receive independent legal advice (ILA) before taking out any equity release product.
Alternatives to a mortgage buyout
Selling the Property
If both parties agree, selling the property and dividing the proceeds can be a straightforward solution. This approach can be particularly beneficial if the property market is strong, and you can achieve a good sale price.
However, it's important to consider factors such as estate agent fees, legal fees, and potential capital gains tax implications.
Transferring Ownership
One party can transfer their share of ownership to the other. This can be a simpler and more cost-effective option than a full buy-out. However, it requires careful legal and financial considerations.
Key factors to consider
- Depending on the property value and the buyer's circumstances, SDLT may be applicable.
- The remaining owner will need to take on the entire mortgage and ensure they can afford the monthly payments.
- Legal fees associated with transferring ownership can add to the overall cost.
Rental Agreement
If neither party can buy out the other, a rental agreement can be a temporary solution. One party can rent their share of the property to the other.
However, this arrangement can be complex and may lead to ongoing disputes, especially if the parties have different expectations regarding rent payments, maintenance responsibilities, and property usage.
- Determine a fair rent amount that reflects the market value of the rented share.
- Clearly define who is responsible for maintenance and repairs.
- Create a legally binding rental agreement to outline the terms and conditions.
- Be prepared to address potential disputes and have a mechanism for resolving them.
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