Biased Deposit + trust deed

Peter1988

Could anyone suggest a good trust deed for a couple with very biased deposits?

Basically the deposit split is roughly 80% 1 persons and 20% the other.

We had a deed on a previous property based on percentages which worked very badly for the person holding the bigger deposit (we had to accept less for the property than we paid)

If we were to make a loss on this property should we ever sell or what have you, and the deed was set to 50% each, the person with the lower deposit would possibly lose out alot more.

I appreciate this is a bit vague but appreciate any comments/suggestions

Thanks

Annisele

Who will be paying the mortgage?

If the deposits and the monthly mortgage payments are both split 80/20, life is easy - an 80/20 split seems fair. If the monthly mortgage payments aren't split in the same way - how are they split?

Are you married to the other person? Is it likely that you will marry them in future? (Marriage changes things...)

LisaLou1982

Well i guess you have one of 2 options...

go % as you did before - obviously the risk is that the property could decrease in value but surely its no different to investing it in the stock market? (prices go up and down)

Protect your initial investment with the actual monetary value in the trust deed - ie: 10k to one, 2k to another, or whatever the value is. But this could present a problem if the property falls in value and obviously doesnt take into account any interest you might have earnt on that money had you invested it elsewhere

Just to add - i put the whole of the deposit down on the property when i bought with my ex. Our trust deed stated that in the event of anything happening, 25% of the property value would return to me on sale, and the rest would be split between us if there were any profit after the mortgage was paid off.

getmore4less

There are 2 basic starting points.

The deposit buys part of the house so is at risk of price drops benifits from price rises.

Or the deposit are loans(to each other) and you own equal shares

Once you get your head around the above choices the rest is simple

You then need to factor in the mortgage payments. you can use these to ballance the shares by paying different amounts or have an unballanced equity share.

You also have to consider how you overpay and invest in improvments
the exact coorct way to do this will depend on the above.

the reality is you have to (in your head) seperate debt from equity they are not connected once the transaction is complete.

your equity is based on the value of the asset.
your debt is based on how much you pay

If you give some real numbers I can do worked examples that will fit and try to explain it a bit more.


There is always the risk whichever way you do it the deposits are at risk.

Richard_Webster

You have to keep records, but surely the fairest method is to record what has actually been spent by each of you. So to start with if the hose were immediately to be sold it would be an 80/20 split of the net proceeds after the mortgage had been paid but as mortgage payments were made they would have to be taken into account too.

For example: A contributes £40,000, B £10,000. They pay the mortgage of £500 per moth 50/50 so after a year each has paid £3,000 towards the mortgage so their total payments by then are £43,000/£13,000 and if the house were then to be sold the net proceeds should be divided in those proportions. If you like you can add in the gas, electricity, water and Council Tax and each pay half of those. Every 2-3 months you write down the figures paid by each of you to date and both sign a statement showing them and each keep a copy. If one pays more at some point for some reason then that person's cumulative total takes that into account.

getmore4less

Richard_Webster wrote: »

You have to keep records, but surely the fairest method is to record what has actually been spent by each of you. So to start with if the hose were immediately to be sold it would be an 80/20 split of the net proceeds after the mortgage had been paid but as mortgage payments were made they would have to be taken into account too.

For example: A contributes £40,000, B £10,000. They pay the mortgage of £500 per moth 50/50 so after a year each has paid £3,000 towards the mortgage so their total payments by then are £43,000/£13,000 and if the house were then to be sold the net proceeds should be divided in those proportions. If you like you can add in the gas, electricity, water and Council Tax and each pay half of those. Every 2-3 months you write down the figures paid by each of you to date and both sign a statement showing them and each keep a copy. If one pays more at some point for some reason then that person's cumulative total takes that into account.

Thats the wrong way to do it, over complicated and does not work properly for all values and requires continuous calculations of what capital is buying what equity.

debt and equity are not the same thing.

Very bad idea to mix in the Asset with the living costs.

Think of is as a house purchase and the associated costs.

Then the living costs as if you were in a rented house share.

in your example with deposits A=£40k B=£10K and say a £60k mortgage paid 50:50 total £110k

on the equity route split is A=70:40=B on sale you split the proceeds 70:30 THEN pay of 1/2 the outstanding mortgage each.

On loan route A lends B £20k-£5k=£15k so equity is now A=55:55=B so 50:50 on sale you split 50:50 pay off 1/2 the outstanding mortgage each then B paus A £15k.

the amount pai on the mortgage is not releven sice much of it is renting money and has nothing to do with the real equity.

getmore4less

An example of why the method is wrong

£100k house A £50k deposit £50 equal mortgage at 5% interest only

house value stable A starts to loose their deposit which is clearly wrong because if you had bought with cash borrowing the money from bank of mum and dad you would not have any change in equity.

house price rises 10% mortgage payments 2.5k per year

Your method A has £50k+£1.25, B £1.25k so they split the £60k b= £1429 A the rest. by year 10 B gets £10k, year 20 £15k

Correct methods equity or loan

A. equity A has 75% B has 25% B gets £2.5k
B. loan A and b have 50% each B gets £5k

stays the same each year

Richard_Webster

I agree that you have to keep reciords and that's a downside of my method and some may prefer not to do that.

However I feel the person paying half the mortgage and having put in little or no capital should get some interest in the house for their money.

At the end of the day the important thing is that those concerned understand the implications of what they are doing and work through various hypothetical situations in terms of length of time in the property and house price variations up and down and see if they both are happy with the various results using their chosen formula.

Problems arise later where one or both hasn't really understood the implications of their formula and later assumes it means something different from what has been written down.

getmore4less

Richard_Webster wrote: »

However I feel the person paying half the mortgage and having put in little or no capital should get some interest in the house for their money.

thats fine, it's how you do it is important so it works correcty for ALL values

A mortgage is just renting money to buy a share of a house.

Your equity is determined by how much of the debt you take on not by how much you pay monthly.

Take another example where one person puts up 50% cash and onother takes out a personal loan and they buy with cash

They own 50% each and it is upto the second to deal with the debt, why should a mortgage be any different?


THe most common error that seems to be made in deeds of trust is to say that I put X in so I get X out and I own X/total of the equity which is wrong.

Karlantya

I have posted a thread in CAB re tennant in common deeds. Please please could you see if you can help me work it out.thank you.

getmore4less wrote: »

thats fine, it's how you do it is important so it works correcty for ALL values

A mortgage is just renting money to buy a share of a house.

Your equity is determined by how much of the debt you take on not by how much you pay monthly.

Take another example where one person puts up 50% cash and onother takes out a personal loan and they buy with cash

They own 50% each and it is upto the second to deal with the debt, why should a mortgage be any different?


THe most common error that seems to be made in deeds of trust is to say that I put X in so I get X out and I own X/total of the equity which is wrong.