How to split house & mortgage 3 ways when 1 person isn't contributing toward deposit?

Sheveko

I've gone in with two other friends on a joint mortgage to buy a house and we're tying ourselves up in knots trying to figure out the best way to divide things and put this into a Deed of Trust.

We want to split things equally three ways. The complication is that one of us isn't contributing any deposit money so they're going to take on more of the mortgage liability to match the deposit money from the other two, like so:

Purchase price = 250,000

Person A
Deposit = 40,000
Mortgage liability = 43,333.33 (25.4902% of mortgage)

Person B
Deposit = 40,000
Mortgage liability = 43,333.33 (25.4902% of mortgage)

Person C
Mortgage liability = 83,333.33 (49.0196% of mortgage)

This way we thought it was a simple matter of each person then paying their percentage of the mortgage payments. And then when it comes to selling up we effectively split the selling price into three pots. Out of each pot each person's remaining mortgage liability is paid off and then the remaining amount is each person's equity or liability.

However our solicitor is saying we should give the deposits back to persons A and B first and then split the remaining equity. But this doesn't take account of person C making larger payments on the mortgage.

Any thoughts? Is there a formula we can use where the deposits are given back first and then we split the remaining equity to take account of person C's larger mortgage payments?

Edit: spreadsheet added:
http://dl.dropbox.com/u/2980189/Scenarios.xls

Thrugelmir

Sheveko wrote: »

Any thoughts? Is there a formula we can use where the deposits are given back first and then we split the remaining equity to take account of person C's larger mortgage payments?

Deduct initial deposits from equity left in property after selling costs and settling the mortgage.

Then divide remainder 25%/25%/50%.

Sheveko

Thanks Thrugelmir, but it doesn't seem to work. If we sold for 300,000 and had no mortgage left then this would mean persons A and B get 95,000 while person C gets £220,000.

PasturesNew

You have to calculate it based on 1/3rds of the selling price. If you sold it next week for the same price as you bought it for, you should end up with £40k in your pocket and the 3rd person with nothing.

So, current price is £250,000. 1/3rd of that is £83,333. Put that into your "pot", settle your mortgage portion and you walk with your deposit. Same for B ... and when it comes to person C their mortgage pot = sales price so they walk with £0.

If you sell it for £500k, 1/3rd of that is £166k, so you pay off your mortgage and walk away with £83k + £40k. Person C takes £166k but has a mortgage of £83k to pay off, so walks with £83k.

Not sure I put that into English ..... but:
- divide selling price by 3
- each settle your portion of the mortgage (25/25/50) individually from your 1/3rd

Sheveko

Yes, all three of us agree with you PasturesNew. The spanner in the works is our solicitor. She says it's not fair to the two who have made a deposit, but our figures suggest it is.

How do we convince her to use this formula, which is based on the selling price, rather than giving the deposits back first?

CLAPTON

obviously you must model the situation and work out the consequences of the different strategies and making different assumptions about selling price
and of course model a decrease in price as well as increase

try modelling

1. no increase in price and you sell up after say 1 year, 5 years, 10 years
2. decrease in price by 10% and you sell in 1 year, 5 years and 10 years
3. increase in by 10% and you sell in 1 year, 5 years, 10 years
spreadsheets are your friend

and that will give you an idea of the consequences of your decision

in any event I hope you have a very very very clear agreement about your exit strategy for the purchase especially if the house decreases in price

getmore4less

Sheveko wrote: »

I've gone in with two other friends on a joint mortgage to buy a house and we're tying ourselves up in knots trying to figure out the best way to divide things and put this into a Deed of Trust.

We want to split things equally three ways. The complication is that one of us isn't contributing any deposit money so they're going to take on more of the mortgage liability to match the deposit money from the other two, like so:

Purchase price = 250,000

Person A
Deposit = 40,000
Mortgage liability = 43,333.33 (25.4902% of mortgage)

Person B
Deposit = 40,000
Mortgage liability = 43,333.33 (25.4902% of mortgage)

Person C
Mortgage liability = 83,333.33 (49.0196% of mortgage)

This way we thought it was a simple matter of each person then paying their percentage of the mortgage payments. And then when it comes to selling up we effectively split the selling price into three pots. Out of each pot each person's remaining mortgage liability is paid off and then the remaining amount is each person's equity or liability.

However our solicitor is saying we should give the deposits back to persons A and B first and then split the remaining equity. But this doesn't take account of person C making larger payments on the mortgage.

Any thoughts? Is there a formula we can use where the deposits are given back first and then we split the remaining equity to take account of person C's larger mortgage payments?

Solicitors(many) don't have a clue when it comes to doing this sort of thing thats why many people have ended up in such a mess.


You have it right, money/mortgage buys a share of a variable asset.

Remember any capital enhancements and maintanence are split 1/3.

Overpayments to the mortgage should be made at the mortgage %.

Sheveko

Thanks Clapton. That's precisely what we've done. Here're a few scenarios.

http://dl.dropbox.com/u/2980189/Scenarios.pdf

Sheveko

What do you guys make of this comment on a similar thread then?
https://forums.moneysavingexpert.com/discussion/comment/4397775#Comment_4397775

Thrugelmir

Sheveko wrote: »

Yes, all three of us agree with you PasturesNew. The spanner in the works is our solicitor. She says it's not fair to the two who have made a deposit, but our figures suggest it is.

Your solicitor is correct. As there's no benefit on the initial deposit put in.

While you are all friends now I would be more concerned as to how the parties extract themselves from the arrangement at a later date.

Sheveko

Thrugelmir wrote: »

Your solicitor is correct. As there's no benefit on the initial deposit put in.

But the same could be said of the person taking on the larger proportion of the mortgage. If the deposits are given back first and only the remaining equity is split then there's no incentive for person C to take on a larger proportion of mortgage. Instead they would be sensible to take on only a third of the mortgage payments and a lesser share in the ownership of the property, which is not what we want.

Thrugelmir wrote: »

While you are all friends now I would be more concerned as to how the parties extract themselves from the arrangement at a later date.

We've decided that we either need to buy each other out, rent a room to help cover mortgage, or sell up. In that order of preference. And we've decided that we should keep the place for at least three years.