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

Sheveko

Doing it Generali's way actually produces the same outcome. I've done the spreadsheet. It's just a more convoluted way of doing it.

Sheveko

DVardysShadow wrote: »

Difficulties arise where the shares are not composed equally if the property has to be sold at a loss against the original purchase. As I see it and as you explain it, losses will be borne equally by the partners. The problem which arises is that the 2 who bring cash to the deal will not get their cash returned in full, but the one who brings no cash will have to stump up some more. Provided this is understood and the 3rd person will cough up if there is a sale, then this is a non issue.

Yes this is interesting. Say we sold for 150000 and had 165000 left to pay on the mortgage. If I run this through my spreadsheet person C would have to pay off the remainder of mortgage as well as come up with £7941.18 cash each for person A and B.

Sale: £150,000 Mortgage: 165000
A £50,000.00: 25.4902% of mortgage = £42,058.82 £7,941.18
B £50,000.00: 25.4902% of mortgage = £42,058.82 £7,941.18
B £50,000.00: 49.0196% of mortgage = £80,882.36 -£30,882.36

getmore4less

Sheveko wrote: »

What if the amount left after paying off the mortgage doesn't quite add up to their £40,000 each + the equity owed to Z. How would you suggest dividing it?

(or for that matter negative equity... but one step at a time!)

Keep it simple you have an algorithm that works.

Forget the deposits/equity paid they no longer exist.

You each own 1/3 of a house and a % of the debt

If 1/3 of the house does not pay your share of the debt you need to find it elsewhere.

Reality is the debt gets paid first so you owe each other untill you get to negative equity then you also owe the lender.

DVardysShadow

Sheveko wrote: »

Yes this is interesting. Say we sold for 150000 and had 165000 left to pay on the mortgage. If I run this through my spreadsheet person C would have to pay off the remainder of mortgage as well as come up with £7941.18 cash each for person A and B.

Sale: £150,000 Mortgage: 165000
A £50,000.00: 25.4902% of mortgage = £42,058.82 £7,941.18
B £50,000.00: 25.4902% of mortgage = £42,058.82 £7,941.18
B £50,000.00: 49.0196% of mortgage = £80,882.36 -£30,882.36

Yes. Person C would immediately be in negative equity from the moment the property dropped below its initial purchase price, because they are effectively on a 100% mortgage. Ideally, Person C should overpay the mortgage, having their share [of the mortgage] reduced and taking all of the benefit of reduced mortgage payments

Sheveko

Hi all, thanks again very much for everybody's advice. It's really helped. The following is our draft Declaration of Trust. Once we're all done we'll post the final version along with our spreadsheets for others to use.

We would be particularly appreciative of any feedback on the wording of clauses 1 and 12. And we're also wondering how we should deal with clause 7 given that one of us is unemployed with sporadic income (but some savings that can cover payments in the short term)?

[full name] cohabitant No. 1, [full name] cohabitant No. 2, and [full name] cohabitant No 3, hereinafter jointly referred to as the Cohabitants, who will live together in the future at [address] hereby agree on this [date] as follows:

1. THE COHABITANTS wish to establish their respective share in the property at [full address] will be as follows (the following does not prejudice money owing to the mortgage lender but is only used to establish the Cohabitants' respective overall share of debt/equity before the mortgage is settled):

1.1. The proceeds from the sale after costs but excluding debt repayment are split 33.3...:33.3...:33.3...

1.2. The debts are paid off as the following percentages by each cohabitant (which may be adjusted in accordance with clause 1.4):

Cohabitant No. 1: 25.4902 Percent

Cohabitant No. 2: 25.4902 Percent

Cohabitant No. 3: 49.0196 Percent

1.3. All payments to the debt during the life of this agreement are also at the same percentages, unless adjusted in accordance with clause 1.4.

1.4. In the event that an overpayment is made which is not in accordance with the percentages as clause 1.2, the percentages thereafter must be recalculated to reflect the new share of equity/debt as follows:

1.4.1. Sum share of debt currently owed by cohabitant making overpayment - overpayment amount = new share of debt.

1.4.2. New share of debt ÷ overall new debt = new percentage share of debt/equity.

2. THE COHABITANTS agree that deposits toward the mortgage will be paid as follows:

Cohabitant No. 1: £40,000.00

Cohabitant No. 2: £40,000.00

Cohabitant No. 3: £0.00

3. THE COHABITANTS agree that each is responsible for their respective shares of the mortgage payments as follows (which may be adjusted in accordance with clause 1.4):

Cohabitant No. 1: 25.4902 Percent

Cohabitant No. 2: 25.4902 Percent

Cohabitant No. 3: 49.0196 Percent

4. THE COHABITANTS hereby agree that if one party wishes to sell their share then the opportunity to purchase that share is firstly given to the other cohabitants.

5. IT IS agreed that if one of the cohabiters wishes to vacate the property but retain their stake then they may rent the room in accordance with the Cohabitation Agreement(s) [insert reference here].

6. COHABITANTS must take out and maintain life and critical illness insurance to cover their respective shares of the mortgage.

7. COHABITANTS must put in place and maintain accident, sickness and unemployment protection sufficient to cover their share of the mortgage payments.

8. THE COHABITANTS will open a joint bank account for the purpose of the mortgage payments and will make timely payments into this account to cover their share of the mortgage.

9. THE COHABITANTS will open a joint bank account for the purpose of renovation costs, with an initial amount of £5000 each, and equal amounts thereafter as agreed. Any amount left over from this account after renovation is complete is to be split equally amongst the Cohabitants.

10. IN THE EVENT of the death of one of the Cohabitants, their estate will be required to meet their share of the mortgage payment until redeemed. The estate must give first opportunity to the other cohabitants to purchase the share, sell the share or rent it until a purchaser can be found.

11. IF a successful claim for critical illness is paid the policy holder must agree to use the funds received to repay their share of the mortgage.

12. IF A COHABITANT deliberately goes into default by absenting themselves without making arrangements to maintain their share of the mortgage or other related payments subject to an agreed time limit the remaining cohabitants can rent their space to pay their share of the mortgage or purchase or sell their share at the market rate.

13. THIS AGREEMENT constitutes the entire agreement of the parties and may be modified only in a writing executed by all Cohabitants.

14. IN THE EVENT it is determined that a provision of this agreement is invalid because it is contrary to applicable law, that provision is deemed separable from the rest of the agreement such that the remainder of the agreement remains valid and enforceable.

15. THIS AGREEMENT is made in accordance with laws of Scotland, England, Wales and Northern Ireland, and in any dispute regarding its enforcement will be resolved by reference to the laws of these countries.

zzzLazyDaisy

One thing does occur to me...

Is this an interest only mortgage or a repayment mortgage? If interest only, it would work. But if it is a repayment mortgage, Cohabitant 3 is paying more into the mortgage and therefore more off the capital. In the early days that probably isn't going to make much difference, but what about in the later stages of the mortgage when it is almost paid off? At that point the third person will have almost caught up with the others in the sense that although he didnt put down a deposit initially, he has been gradually chipping away at the capital in greater chunks than the others and this will become very apparent in the later stages of the mortgage.

Of course I haven't had the advantage of considering the spread sheets and it may be that this has been taken into account, but I raise it anyway, just in case.

Sheveko

Hi Daisy, it is repayment (and I assume you mean cohabitant 3). So, yes, once the mortgage is paid off then the selling price of the house is split three ways. That's the point of the arrangement, of cohabitant 3 taking on a larger proportion of the mortgage (enough to match the deposit of the other two).

Here's the spreadsheet (not the final one but enough to do the calcs):
http://dl.dropbox.com/u/2980189/Mortgage-and-equity-calculator.numbers (Numbers)
http://dl.dropbox.com/u/2980189/Mortgage-and-equity-calculator.xls (Excel)

zzzLazyDaisy

Thanks - yes I did mean cohabitant 3.

I was thinking of more whether the spreadsheets take into account the sliding scale - of cohabitant 3 gradually building up a stake in the house - so that if the house is sold before the mortgage is paid off, but closer to the end of the term when the third person has already accrued a 'bigger slice of the cake' whether the formula would take this into account.

Thanks for the spread sheets - I haven't looked at them as the numbers leave me boggle eyed - but it seems from what you say, that you've taken this factor into account.

Sheveko

Thanks Daisy, yeah we've got that aspect covered. The percentage split of the debt just works everything out perfectly, including when we go into negative equity.

What do you think about the wording of clause 1? Do you think we've got your main concern covered regarding the usual legal sequence of dividing up the proceeds of the sale?

Ilya_Ilyich

Unless I'm missing something it looks like Cohabitants 1 and 2 are getting a bad deal out of this. Correct me if I'm wrong but if you hold the investment to term each cohab has spent £83,333 absolutely and getting a third each of equity. But 1 and 2's payments were frontloaded so their accumulated value should be higher than 3's and they should be given a higher share of the equity. This will hold at any time during the term so essentially 1 and 2 are subsidising 3 even though they're the ones coming up with the initial capital.