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

zzzLazyDaisy

Sheveko wrote: »

Where would this accumulation come from though? The 40000 deposits are not earning interest.

That's right - and however you choose to buy a house, you will always need a deposit and that deposit will never earn interest, so you are not losing anything.

Cohabitant 3 is, in effect, borrowing his deposit, and paying interest on it, so he is (rightly) paying extra interest. It also means that he is able to buy into property on the back of your deposits, and without that he would not be able to get a mortgage anyway. So yes he is benefitting, but that does not mean you are losing (if that makes sense?)

One other thing - you probably know this - but as far as the lender is concerned, you will all be jointly and severally liable for the whole debt, and if one defaults thus putting you into arrears, the lender can come after all of you or just one of you, for the whole amount. It would then be up to you to chase the defaulter for repayment of the money.

Sheveko

zzzLazyDaisy wrote: »

One other thing - you probably know this - but as far as the lender is concerned, you will all be jointly and severally liable for the whole debt, and if one defaults thus putting you into arrears, the lender can come after all of you or just one of you, for the whole amount. It would then be up to you to chase the defaulter for repayment of the money.

Yeap, thanks, we're aware of that one.

Daisy, do you think we've got the wording of clause 1 nailed?

Sheveko

The situation is this:
1 and 2 have enough for a deposit but don't have enough income to afford a large enough mortgage.
3 has no money for a deposit but has enough income to afford a large mortgage.

All three a very good friends and trust each other immensely. It's a match made in heaven in these times

Ilya_Ilyich

Sheveko wrote: »

That's correct.

Not sure what you mean by 'exactly'. Where would this suggested accumulation come from?

Partly it reflects interest, investment returns, time value of money. I'm trying to get across that absolute values of pounds become relatively less valuable over time as incomes increase etc, so 3's higher contributions aren't as significant later on in the term. Basically 3 is getting a sweeter deal than 1 and 2 to the tune of at least a few thousand in today's money, when you discount the future value of payments.

Present value of 40k + £199.68pm for 300 months = £78,114 @ 4% interest, £71,464 @ 6%.
PV of £384pm for 300 months = £73,297 @ 4%, £60,500 @ 6%.

It varies depending how you choose to discount it but 3's payment schedule is a lot more attractive than 1&2's. If you're fine with subsidising him though that's cool!

getmore4less

zzzLazyDaisy wrote: »

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.

I have been away,

picking this up first.

it works for repayment or interest only,,

Each is resonsible for their share of the debt and the interest so it "just works". there is no change in the % ownership as the mortgage is paid off.

getmore4less

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.

I have not stress tested this algorithm but it sounds about right in principle but a couple of flaws in the wording.

1. if you remove the equity bit.
The share of the house should not change from 1/3 each.

2. ALL shares of debt change on an overpayment by anyone so 1.4.(1&2) needs amending.

getmore4less

zzzLazyDaisy wrote: »

And they will also have had the benefit of living in a house which presumably cohabitants 1 & 2 could not afford on their own, even with their deposits (that is a big presumption so apologies if I am wrong, no offence intended)

The easy way round this on paper is to deal with this as a house share rental for occupation and as a BTL for ownership.

This is probably a good idea anyway since it sets the parametars should any one of the 3 become non resident and true lodgers are an option.

getmore4less

Sheveko wrote: »

The situation is this:
1 and 2 have enough for a deposit but don't have enough income to afford a large enough mortgage.
3 has no money for a deposit but has enough income to afford a large mortgage.

All three a very good friends and trust each other immensely. It's a match made in heaven in these times

Many have come unstuck.

pretend you don't trust anyone to get the agreement thrashed out.

getmore4less

Ilya_Ilyich wrote: »

Partly it reflects interest, investment returns, time value of money. I'm trying to get across that absolute values of pounds become relatively less valuable over time as incomes increase etc, so 3's higher contributions aren't as significant later on in the term. Basically 3 is getting a sweeter deal than 1 and 2 to the tune of at least a few thousand in today's money, when you discount the future value of payments.

Present value of 40k + £199.68pm for 300 months = £78,114 @ 4% interest, £71,464 @ 6%.
PV of £384pm for 300 months = £73,297 @ 4%, £60,500 @ 6%.

It varies depending how you choose to discount it but 3's payment schedule is a lot more attractive than 1&2's. If you're fine with subsidising him though that's cool!

1&2 have a choice on their investment, chosing to buy a share in a house may be better than the other options currently available that they are comfortable with.

Investing the cash is probably better for them than relying on future value of the money they will earn, remember they are income poor, capital wealthy.

Your FV are very optimistic at 4% currently they can not match the mortgage rate.

Will they see pay rises for future value to even work.


The big risk in this senario is 3 loses their income since it looks like they are dependant on it.

Ilya_Ilyich

getmore4less wrote: »

1&2 have a choice on their investment, chosing to buy a share in a house may be better than the other options currently available that they are comfortable with.

Investing the cash is probably better for them than relying on future value of the money they will earn, remember they are income poor, capital wealthy.

Your FV are very optimistic at 4% currently they can not match the mortgage rate.

Will they see pay rises for future value to even work.


The big risk in this senario is 3 loses their income since it looks like they are dependant on it.

We need to discount using an interest rate of 2.77% in order for 1&2's payments to equal 3's over the term. Anything higher and 1&2 are effectively paying more than 3, anything lower and 3 is paying more thn 1&2. I'd say that this is a pretty lower rate to use for a 25-year term; I think it's absurd to say 4% is 'very optimistic' when you could easily exceed that risk-free over the term.