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

Sheveko

Thanks Ilya. It's an interesting angle, but I think one we're prepared to put up with. The other factor is that we're all currently rent payers and at current interest rates this arrangement is going to lower our outgoings significantly (particularly 1&2) and allow us to have our own home.

Sheveko

getmore4less wrote: »

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

3 will be covering that with (rather expensive) income insurance.

DVardysShadow

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.

It makes very little difference whether the mortgage is repayment or IO, provided on IO, the outstanding capital is ultimately repaid in the proportions to which the parties are responsible for the mortgage.

You would expect C to be paying more of the capital - he owns £83,333.33 of the debt, whereas the other 2 each own £43,333,33.

Never mind the spreadsheets, the maths behind this is quite straightforward and allows you to do it without reams of numbers.

Ilya_Ilyich wrote: »

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.

You are over complicating the matter, quite unnecessarily.

All 3 are buying equal shares at the exactly identical price of £250,000/3. Some are putting in some cash, some are 'renting' the money through the mortgage. All have to pay back the money they are renting over the term of the mortgage. The mortgage components should be left out of the equality calculations, because they could [notionally] source their finances independently for the equity they don't have

DVardysShadow

Sheveko wrote: »

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.


....

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.

The reason for legal venue clauses is to avoid disputes over which laws to use. So choose just 1. Most naturally, it would be the one in which the property sits.

zzzLazyDaisy

Also the property laws in Scotland are very different from England/Wales in lots of ways, so this is another reason for just choosing one country!

Sheveko

DVardysShadow wrote: »

You are over complicating the matter, quite unnecessarily.

All 3 are buying equal shares at the exactly identical price of £250,000/3. Some are putting in some cash, some are 'renting' the money through the mortgage. All have to pay back the money they are renting over the term of the mortgage. The mortgage components should be left out of the equality calculations, because they could [notionally] source their finances independently for the equity they don't have

This is a really good point (I think getless4more made it earlier too). If we all sourced our share of 250000 independently on the same terms it wouldn't make any difference to the numbers.

We'd pay 250000 cash for the place and we'd each be left with the following loans:
1. 43333.33 @2.74% = £199.68pm
2. 43333.33 @2.74% = £199.68pm
3. 83333.33 @2.74% = £384.00pm

1 & 2 might like to invest their 40000 elsewhere and pay 100% of their loans too but then they wouldn't be able to afford it.

Suarez

DVardysShadow wrote: »

You are making a meal of this. Doing it PasturesNew's way, the fact that the one with responsibility for 50% of the mortgage has contributed most to paying down the mortgage will 'come out in the wash'.

And so they should if they dont have a deposit...

Ilya_Ilyich

DVardysShadow wrote: »

You are over complicating the matter, quite unnecessarily.

All 3 are buying equal shares at the exactly identical price of £250,000/3. Some are putting in some cash, some are 'renting' the money through the mortgage. All have to pay back the money they are renting over the term of the mortgage. The mortgage components should be left out of the equality calculations, because they could [notionally] source their finances independently for the equity they don't have

The deal isn't possible without 1&2's capital. Taking one joint mortgage and splitting it proportionately isn't equivalent to 3 separate loans; 3's lack of initial capital means he's raising the LTV so he's increasing the rate 1&2 pay and they're reducing the rate he pays.

3 has a more attractive payment schedule than 1&2, and they can't adopt his more attractive schedule for themselves because they're paying for the lower mortgage rate. They're losing out because they've brought more capital to the deal which seems unfair to me.

zzzLazyDaisy

Ilya_Ilyich wrote: »

They're losing out because they've brought more capital to the deal which seems unfair to me.

But as has been previously pointed out - 1 & 2 have the choice of buying a property together using their deposits, which you give them access to cheaper loans. They have chosen to enter into this arrangement with 3 because their buying power doesn't enable them to buy the sort of house they want to buy. So while you are right that the deal is not possible without 1 & 2's capital - it is also not possible without 3 taking on responsibility for the extra loan they need in order to fund the deal.

So in my view, while it is important to get a fair deal hammered out (and everyone seems to be working towards this) it is also important to bear in mind the practical advantages (and disavantages) of the deal. As it stands 3 not only has much more monthly expenditure on the mortgage than the other two, but will also have a more expensive income protection policy to pay as a result.

If 1 & 2 make it too difficult for 3 to join them in this venture, he will drop out, leaving the two of them unable to proceed.

DVardysShadow

Ilya_Ilyich wrote: »

The deal isn't possible without 1&2's capital. Taking one joint mortgage and splitting it proportionately isn't equivalent to 3 separate loans; 3's lack of initial capital means he's raising the LTV so he's increasing the rate 1&2 pay and they're reducing the rate he pays.

3 has a more attractive payment schedule than 1&2, and they can't adopt his more attractive schedule for themselves because they're paying for the lower mortgage rate. They're losing out because they've brought more capital to the deal which seems unfair to me.

3 is at far more risk of negative equity than the others.

Simply for the fact that they don't all bring the same equity to the deal, how things are worked out will never bring full equality over the whole deal.

The best that can be done is to apportion the property equally - which they have done and bring 1/3 of the price each to the deal - which they have done. Because they bring their 1/3's to the deal in different ways, it will pan out differently for the 3 of them.

You could go for compensatory payments to do with different interest rates due to different LTV. But it would all become unstitched when they remortgage with a different LTV. As LD says, none of them would have a deal without the others, so it is not as if any of them is sacrificing a better deal at a lower LTV to go in to this deal