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

getmore4less

Thrugelmir wrote: »

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.

The solicitor and you are both wrong.

The £40k deposits buy a share of the equity and that varies with the value of the house. It goes up/down with the value of the house.

The lending is to be split to make the equitable shares 1/3 each to take acount of the diverent deposits.

It is the equivilent of 6 people buying where 2 do £40k and 4 doing a 1/4 of the rest each.

sell up you split the equity on the same % amongst the 6, anyone that borowed their money pays off their own debts.


Just happens that the lending has to be done as a mortgage and each person has 2 bits of the 6 shares.

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If the solicitor won't understand and you don't want to change solicitors the other way to do this is.....

1 & 2 lend 1/3 of the £40k each to the 3rd person and they have the same deposit and share the mortgage 1/3rd each.

that way all, three extract their deposits and 3 pays back their debt to 1&2.

It works out the same as doing it the way you wanted for ALL variations in value, unlike the other suggested method.

It might be easer for the solicitor to understand this way and a bit easier to draw up a trust but complicates the tax situation if the personal loans have interest
This can be got round by doing different mortgage payments(back where you started)


Agree with the second comment a fully planed exit stratagy will be needed

Sheveko

getmore4less wrote: »

The solicitor and you are both wrong.

The £40k deposits buy a share of the equity and that varies with the value of the house. It goes up/down with the value of the house.

The lending is to be split to make the equitable shares 1/3 each to take acount of the diverent deposits.

It is the equivilent of 6 people buying where 2 do £40k and 4 doing a 1/4 of the rest each.

sell up you split the equity on the same % amongst the 6, anyone that borowed their money pays off their own debts.


Just happens that the lending has to be done as a mortgage and each person has 2 bits of the 6 shares.

Phew, you really lost me there. Any chance of restating? Would this give us the equal share of ownership we're after?

zzzLazyDaisy

How about this scenario....

You go make the arrangement that you want. After three years the house is sold and after the mortgage is paid off, the net proceeds of sale are £80,000... in other words the value hasn't really gone up or down. So you split the £80k three ways, which means the two who put in the deposits have suffered a loss, and the person who paid no deposit has made a profit.

Or am I missing something?

getmore4less

The problem that arises is that mortgages are not seperate from the property so even though for equity you want to adjust the payments all 3 will be fully liable for the full amount and in the event of sale the mortgage gets paid off first and calculating the share from there is not so easy.

The way you described works for the numbers but not so easy to describe with what is probaly the legal sequence where the mortgage needs to be paid off first.


If the loans were all seperate so all three paid 1/3 each no one would have any issue with the math, make it a mortgage and people just can't grasp the basics.


3 people buy a house for £250k 1/3 each sell they get 1/3 each back.

If they borrowed the money they pay off their loans from the proceeds.
(having paid their own loans in the mean time)

If those loans are combined into a mortgage to seems to change things

WHY?

Sheveko

zzzLazyDaisy wrote: »

How about this scenario....

You go make the arrangement that you want. After three years the house is sold and after the mortgage is paid off, the net proceeds of sale are £80,000... in other words the value hasn't really gone up or down. So you split the £80k three ways, which means the two who put in the deposits have suffered a loss, and the person who paid no deposit has made a profit.

Or am I missing something?

I think so. We wouldn't split the 80,000 three ways. The formula would be 1/3 of selling price minus remaining mortgage liability for each person = each share. So person C would get 0 and the other two would get 40,000 each.

Like in scenario one, right?
http://dl.dropbox.com/u/2980189/Scenarios.pdf

getmore4less

zzzLazyDaisy wrote: »

How about this scenario....

You go make the arrangement that you want. After three years the house is sold and after the mortgage is paid off, the net proceeds of sale are £80,000... in other words the value hasn't really gone up or down. So you split the £80k three ways, which means the two who put in the deposits have suffered a loss, and the person who paid no deposit has made a profit.

Or am I missing something?

YES you split the 1/3 shares THEN pay off the mortgage in the % being paid.

Using the op rules and equal value on sale then for an I/O mortgage 1&2 get £40k each 3 gets £0

Sheveko

Surely there is a formula whereby the deposits are given back and then the remaining equity is split to take account of the different mortgage payments?

The percentages of the remaining equity split has to be adjusted somehow, taking into account the 40K deposits.

Raggie

off topic..... but similar....

Three men go into a shopt,they buy a tv for £30, they all hand over £10 each then the shop assistant is told that the tv is actually reduced to £25 so the assistant takes the £5 change, gives each man £1 each change and keeps the remaining £2 for himself. Now each man has paid £9 each (£27 altogether) and the shop assistant has £2 where is the other £1?

On topic..

I would say the amount of deposit paid should be taken out of the capaital (either posative or neagtive) before calculating any money returned.. or in the case of a loss.. money owed...

Generali

There isn't going to be a way to do this that is both simple and fair because at different points in time, different people will have paid in different amounts.

My solution would be thus.

X puts in £40,000 deposit and borrows £43k
Y puts in £40,000 deposit and borrows £43k
Z borrows £40,000 'deposit' and borrows £43k

Using a spreadsheet you can work out how quickly Z is repaying the the deposit part of the mortgage. PM me if you want a mortgage repayment spreadsheet. When you sell, assuming you make a profit which isn't a given, X & Y should get their £40,000 back and Z should get back the part of the deposit loan that has been repaid. The remainder, after the mortgage has been repaid of course, should be split 3 ways.

The only weakness I can see is that is you sell for less than you bought, X & Y have 'skin in the game' whereas Z does not. If I was investing as X or Y I would either want Z to come up with a deposit too or for me to stand to gain more to reflect the fact that I am effectively providing Z with a deposit.

Some general advice would be:

- Plan an exit strategy, e.g. what happens if one wants to sell and 2 don't or 2 want to sell and 1 doesn't?
- Plan for what happens if you make a loss. How does Z take a hit or do you accept that X & Y lose money before Z does?
- Make sure all three of you are taking on the credit risk, not just you. (Even better would be for the mortgage to be in one of the other people's name. It's probably not fair but life isn't fair. Could Z have the mortgage in his name to reflect the fact that he s taking on less risk than X & Y?)
- Work out how you will pay for repairs, voids (presumably you'll rent this place out), EA fees etc. I'd start a sinking fund offset against the mortgage if I could.
- Work out exactly how you plan to make money from this investment. Are you after yield or capital growth or both? What will you do if your returns are less or more than expectations?
- Make sure you have contracts etc in place. Don't rely on verbal agreements between mates or family.
- Talk about exactly what each of you expect from this investment. If one of you wants an income and another a nest egg you might find tensions build up.

getmore4less

Generali wrote: »

There isn't going to be a way to do this that is both simple and fair because at different points in time, different people will have paid in different amounts.

Each person buys a share in variable asset with cash or debt.

The house value varies but your % ownership does not so thats what you own

From the share of the proceeds you get you pay off your share of the debt.

The key is to keep the debt parts in ballance so thats why the % of the morgage calculated to ballance the equity at the start is the % that should be pid and for any overpayments.


This is the simple and fair way to do it, there are variations but most of the alaternative just don't work for all situations of rises and falls in value.

The take you deposit back, is benifitial to the deposit payer on falls in value but penalises them on rises.