Profit split problems.

Alan_M_2

hazza1969 wrote: »

My point was that if we'd been permitted to borrow money seperately the situation would have been as follows (using example figures). House costs £200,000. Friends existing capital £50,000, friend borrows £50,000. I borrow £100,000. We have each contibuted £100,000. How is this different to friend using £50,000 capital and us then borrowing £150,000 but me paying for 2/3 of that?

What is wrong with that is no matter what amount you agree to split - you are jointly for the entire sum should any default occur. You are also benefiting from your friends deposit by the lower interest rate it gains by being there to start with.

Your friend is in a better financial position than you and will therefore own a larger proportion of the investment, - if you want an equal share you should be approaching the transaction with equal terms - a £50,000 deposit of your own.

If you borrowed this yourself that would solve the problem, but borrowing it incorporated into a joint mortgage is not reasonable.

The first house I ever bought was on this basis, I owned a third, my friend two thirds, but this was split down all the way, I had a one third deposit he had two thirds, the mortgage was split to the same percentage, and home improvements were split the same way, but household bills were split down the middle.

This was our arrangement from the word go, and it worked.

What you are effectively trying to do is use your friends deposit as leverage for your own borrowing. Your friend is correct wanting an unequal split, if I were in their position and you were asking for an equal split I'd walk away from the transaction.

leftieM

The fact that you have an IO mortgage weakens your case too. If you were offering to pay more of the mortgage and this was reducing the capital you might have an argument for getting a higher percentage of the house. However you will owe the same on day one as on day 728, no matter who pays what. You are hoping for a rise in house value presumably. What if the market falls? If you had a 50:50 split and the market fell by the value of your friend's deposit would you happily find the money to give them half of the loss? You could walk away whereas they would have lost all of their capital.
They have the money, they have the higher risk and they should have the opportunity for more of the rewards.

hazza1969

I would genuinely want to borrow 2/3 of the outdstanding amount but we've been told that the banks won't permit that, it's not that I'm unwilling to do that - in fact it's preferable.

"You are hoping for a rise in house value presumably. What if the market falls? If you had a 50:50 split and the market fell by the value of your friend's deposit would you happily find the money to give them half of the loss?" - I'd be more than happy to sign an agreement to the effect that I was liable for 2/3 the debt. I'm not looking to gain advantage at my friends expense, I'm trying to find a fair way to obtain a 50/50 partnership.

I don't think I'm going to find my answer on here to be honest, I think I'll seek professional advice instead.

Thanks for your help anyway.

Alan_M_2

Signing an agreement is nothing to do with your problem.

If you want a 50/50 arrangement, you have to go in with equal footing from day one - that means you need to match any deposit the other party is willing to put up, if you think it will work any different you are being naive.

That doesn't mean you have to find £50K it means your partner puts up £25K and you put up £25K you then have a joint mortgage split equally - there is no other scenario - that's it.

You have been given the answer clearly by numerous posters, it seems you don't like what the answer is so you'll be looking elsewhere until someone tells you what you want to hear.

I for one wouldn't invest in anything with a business partner behaving in this manner.

Alan_M_2

Having thought about this as a result of another thread on here:-

http://forums.moneysavingexpert.com/showthread.html?t=403846

You have one possible option that makes the playing field level and a 50/50 split correct.

Your friend lends you part of his deposit as a personal arrangement outside to mortgage agreement.

Without the figures it's not possible to run into greater detail , but look at the link I posted for a explanation of the principal behind what I suggest.

This is fine, but effectively your friend is lending you money to invest on which you're making money - Why would He want to do that? He'd want to invest it himself and reap the rewards.

rosysparkle

hazza1969 wrote: »

My point was that if we'd been permitted to borrow money seperately the situation would have been as follows (using example figures). House costs £200,000. Friends existing capital £50,000, friend borrows £50,000. I borrow £100,000. We have each contibuted £100,000. How is this different to friend using £50,000 capital and us then borrowing £150,000 but me paying for 2/3 of that?

You've only each contributed 100,000 once the mortgage is repaid from your individual funds. Unless you plan to have it all paid off before you sell, the 50/50 split is most unfair to your partner.

If you sell the house after two years and in that time you've paid off a total of (for example) 12,000 off the mortgage, of which you have paid £8,000 and your partner £4,000, then your partner has paid £54,000 of the house purchase price and you have paid £8,000.

It's clearly not fair for you to share any profit 50%.