How is a mortgage discharged on sale when there's a deed of trust?

grifferz

I apologise in advance for the length of this post but it's going to need a thorough statement of the situation and how we got here. I want to try to avoid you having to ask me for clarifications.

My partner and I are first time buyers. We've been living together as an unmarried couple for about 5 years, in rented accommodation, and are currently in the process of buying our first home.

We have a very imbalanced financial setup. Due to various factors like:

• Well off family
• Always lived at home rent free
• Generally frugal and careful with her money
• Low paying part-time work

my partner has a lot of savings despite her low salary.

Due to various factors like:

• Not well off family
• Always rented privately since age 18
• Spent ages 18 to ~28 being terrible with money before seeing the money-saving light
• Better job
• Paying all bills and almost all rent since we moved in together (not a complaint, have been happy to do so, it's just the way it is)

I have virtually no savings, though do have a reasonable salary and still an excellent credit record.

As a result of combining her savings and my salary we have had no difficulty obtaining a mortgage agreement in principle for sum of £X to which my partner will contribute a further £X as deposit, resulting in a 50% LTV. My small savings will be retained for fees and moving in costs.

Naturally given this immense imbalance of initial financial input and risk, we are agreed that we need a deed of trust to protect her deposit. Everyone we asked said this would be easy, though admittedly we did not ask a solicitor at that stage.

I will not go into the point by point detail of the deed of trust we'd like to have, but the gist of it is:

• Recognise that she has provided £X deposit for an initial purchase price of 2x £X
• 50% share of equity each
• All mortgage payments to be made by me
• If either of us wants to sell, we must sell
• Upon a sale, we each get 50% of sale price then discharging the remaining mortgage will be my responsibility from my share

So, as an example of that last point, example figures here, say property was bought for £240k with a £120k deposit and then sold for £250k with £100k remaining on mortgage: that would be £125k each then I'd have to discharge the mortgage of £100k leaving me with £25k and her with £125k.

(Given such a large deposit, negative equity to the point where we can't sell doesn't seem feasible - the house would have to halve in value - but would mean that partner wouldn't get her full deposit back in that case. We've agreed we both bear that risk equally, so I'll say no more about that.)

We've now had an offer accepted, mortgage applied for, conveyancing underway, survey booked. We visited solicitors two days ago to discuss our deed of trust (same solicitors who are doing the conveyancing), and basically solicitor has taken one look at our desired terms and said (from my notes):

"This is mostly fine, the only problem is that as the mortgage lender has first charge, there is a significant risk to (partner) here should (grifferz) decide to default on his mortgage payments.

This represents a conflict of interest so I recommend that at least (partner), preferably both of you seek independent legal advice on this. We could not be your independent advice because we are already acting for you both jointly in your conveyancing. I can proceed but it would be on the understanding that I've made your need for independent advice clear.

In the case where (grifferz) defaults on his mortgage repayments, the lender may move to repossess and take (partner) to court. These extra charges including legal fees will be added on top of your mortgage so when you eventually sell, you may have a large amount deducted from the proceeds and it could eat into (partner)'s deposit."

Now, we were of course already fully aware that the mortgage lender has first charge. We were aware that we are both severally liable for the full mortgage. That's why we said if either of us wanted to sell we'd have to sell immediately.

Neither of us can work out exactly how me defaulting on the mortgage could rack up such high bills that it could blow through the entire 50% equity she starts with and then into my partner's deposit.

We feel that the solicitor is just (arguably quite rightly) doing her job and highlighting the absolute worst case scenario for my partner.

I mean, even if she did something so horrendous to me, I don't know, agreed to get a dog then set it on fire in front of me and then married my brother, so then in retaliation I have a mid life crisis, spend my limited funds on a flashy car and walk (drive very fast) away from the property and never come back.. the mortgage payments are still only half of the rent we pay now so with the aid of her fairly well off father could pay it herself even for a year or more without having any issue with the lender. During which time she would be selling it as soon as possible. These are not my words, this is her comment to me upon discussion.

So anyway in response to the sort of scenario that the solicitor conjured up, I said:

Okay, but we always knew that sort of risk existed. Presumably if we each went to other solicitors and explained this setup, all they are going to be able to do is tell us that this risk still exists? I mean, there is nothing that anyone can do to mitigate this risk beyond what we have presented, right?

To which she basically agreed that she could not imagine any further mitigation, but still said that she must advise we seek independent representation.

We were both a little bit stunned at this outcome and it being a Friday afternoon decided we wanted to leave and discuss it over the weekend. It was only later on when we came to the conclusion that quite a lot of her perceived risk hinges on how the mortgage would get discharged upon sale.

Going back to the example figures I gave above, what we absolutely would not want to happen is the following:

• Sell property for £250k
• Our solicitor discharges mortgage of £100k, leaving £150k
• Our solicitor sees we have 50% equity each from our deed of trust and transfers £75k to each of us

That scenario would mean that I have come into possession of £50k of my partner's deposit and (if we assume I have become extremely hostile to her) she may have to sue me to get it back, under the terms of our deed of trust.

We'd want our solicitor to see from our deed of trust that the outstanding mortgage of £100k must be discharged from my share of £125k, leaving the other £125k clear for my partner.

We then asked for clarification of this to our solicitor in email but she has made it clear that before she will say more she wants us to either seek independent advice or else confirm that we're not going to, against her advice.

I understand that this forum cannot give legal advice, but I just wanted to get your opinions on how mortgages are discharged upon sale and if the thing we want to happen can be made to happen.

I absolutely want the best protection for my partner and don't want her to feel I am pushing her into just going ahead - even her parents are telling her that the solicitor is just covering herself against any possible future claim from either of us that the advice was bad, and that she should go ahead.

IF discharging the mortgage can work how we would like then to make progress as far as I see it we have a few options:

1. Just tell our solicitor that we both appreciate the risks and are happy with the advice and to go ahead and prepare the deed as discussed
2. Partner gets herself a solicitor, prepares same deed with them. I am not present, I just sign it once it's done
3. We both get different solicitors and they all play paperwork ping pong
4. We pull out of our house purchase and focus on me having more savings so there is more of a buffer

Since I am not really risking any assets I don't see the point in having my own solicitor, so I'm comfortable ruling out (3). If I can't understand the document produced by (2) then I may reconsider at that point. Really (1) sounds best but then I would say that and (2) might be prudent just so there can never ever be any recriminations.

(4) just seems stupid as we would both be so much better off her not seeing her savings dwindle and me being able to buy equity in my home.

HOWEVER if she is going to be relying on me to settle up her share of the deposit then I am not sure we have a way forward as that is always going to be a big chunk of money.

There could be some convoluted scheme where I start off with 0% equity and we adjust my share every few years as I pay off more and more mortgage. It sounds a real hassle but if it was the only option then I'd be willing.

So then under the convoluted scheme let's say it's 5 years in and the burning dog/brother/fast car scenario took place, sale is forced and I've paid off 15% of the mortgage:

• Sale price £250k
• £120k mortgage less £18k paid off = £102k
• Proceeds = £250k - £102k = £148k (ignore fees for simplicity)
• £125.8k to her (85%), £22.2k to me (15%)
• If I'm lucky she settles up with me the other £800 so I'm back at £23k (what I'd be left with under our ideal outcome having discharged a £102k mortgage from my £125k)

I'm sure some reading this will feel like saying "well if you don't trust each other then don't buy a house together!" If so, please don't. That's not the issue. I love and trust my partner and I know she feels the same but this is her life's savings we are talking about here. Anything we can reasonably do to protect them, we must do. The only reason it's me typing all this is because I'm better at typing long tedious things all day!

Thanks so much for reading this far!

Annisele

I also think your proposed deed of trust is horribly unbalanced.

Let's pretend:

• You buy for £200k - funded £100k deposit (provided by your partner) and £100k mortgage.
• House prices fall by half. (This is possible, even if not likely).
• You want to sell - which you can do, because your agreement says either of you can sell at any time.
• Your house sells for £100k. The solicitor handling the sale uses that £100k to discharge the mortgage.
• There's no equity to distribute, so you both walk away with nothing.

bigadaj

Can't blame the solicitor really, I wold just acknowledge this point and ask her to proced as you have been made aware of the potential issues and had them flagged up.

If i we're you i would model a range of scenarios, in terms of length of time to a split, and various levels of house price rises and falls and clarify how this would be managed. The real problem comes in a split within the first few years, and a fall in house price potentially with fees. In this case your partner would be out of pocket, and you would need to arrange a mechanism for you to fulfil your portion of te shortfall within a reasonable time period from your income and salary.

Not very romantic but better to think of now than after a split with the consequent emotions etc

grifferz

Annisele wrote: »

I also think your proposed deed of trust is horribly unbalanced.

Let's pretend:

• You buy for £200k - funded £100k deposit (provided by your partner) and £100k mortgage.
• House prices fall by half. (This is possible, even if not likely).
• You want to sell - which you can do, because your agreement says either of you can sell at any time.
• Your house sells for £100k. The solicitor handling the sale uses that £100k to discharge the mortgage.
• There's no equity to distribute, so you both walk away with nothing.

So let's pretend all that happened but she was single and I didn't exist. She would be in the same position. Except since she does not have a high enough salary on her own she could never afford to purchase the property in the first place.

Even if she bought a smaller property on her own that she could afford, in the nightmare scenario of a halving of property values she's still going to lose a vast sum and by herself all she's affording is a one bedroom flat or bedsit so is likely to be percentage-wise worse off than owners of houses.

Also, this is London and even as we type the prices in the area we're buying are increasing faster than we can save; we are already kicking ourselves for not buying this time last year as sold prices have increased £10k-£15k in that time.

I take your point regarding the "either one can force a sale" clause; the two of us agreed that one thinking it would protect her more, so that if I was for some reason behaving detrimentally she could always sell up and hopefully get her investment back. I admit we didn't consider a case where I might force a sale that is a loser for her. In light of the imbalance, perhaps it would be better if she had sole decision over selling, at least up until I had paid off a certain percentage of mortgage anyway.

Returning to the main question, and again using the example figures of £240k purchase price, £120k deposit, £100k mortgage left to pay, £250k sale price:

If we specifically stated in our deed of trust that the sale is handled in this order:

• Outstanding mortgage discharged (£100k to lender)
• Partner's deposit repaid if possible (£120k to her)
• Remainder if any split equally (£15k each)
• She to recompense me back to my half of proceeds minus mortgage (£10k to me)

Then would the solicitor dealing with the sale be bound to do the first three steps leaving the last step for her to do as per the agreement or face being sued by me?

If so then that may be a solution as this is a much smaller risk, and it's on me which is fairer.

There's no getting away from the fact that being party to the mortgage leaves her exposed to some cataclysmic halving of property values.. but 50% LTV surely that is a lot safer than most FTBs? The only option for her that is safer would be to buy a one bed flat herself and have me as a lodger but she does not want her first purchase to be a flat when our first joint purchase could be a house. That is going to have to be a risk/reward judgement for her to make (has been made already).

grifferz

bigadaj wrote: »

If i we're you i would model a range of scenarios, in terms of length of time to a split, and various levels of house price rises and falls and clarify how this would be managed.

At the moment just knowing if we can specify how the future proceeds would be distributed would inform our decision.

bigadaj wrote: »

The real problem comes in a split within the first few years, and a fall in house price potentially with fees. In this case your partner would be out of pocket, and you would need to arrange a mechanism for you to fulfil your portion of te shortfall within a reasonable time period from your income and salary.

I am mindful of this; the mortgage is small enough that it will be much cheaper than our current rent and so I intend to aggressively overpay in order to build up equity quicker.

bigadaj wrote: »

Not very romantic but better to think of now than after a split with the consequent emotions etc

Believe me, I've seen many many people on these boards end up in awful situations and have also seen my own mother taken for a 5 figure sum as a result of not considering the financial repercussions of future relationship breakdown. It's because I care for my partnerthat I am keen to get protections in place, as fair as possible while still being able to achieve what we both want.

antrobus

grifferz wrote: »

........., but still said that she must advise we seek independent representation.

We were both a little bit stunned at this outcome ...

I don't really see why.

Two people want to make an agreement. A solicitor cannot give advice to both parties, as that would be a conflict of interest. In your case you've already enagaged this solicitor to act on your joint purchase of a property, so they are not really in a position to give either of you individual advice regarding your proposed trust deed.

Your solicitor is simply being scrupulously professional.

Annisele

I'm afraid I'm still with the solicitor on the "you should seek independent advice" point.

If you hadn't considered what would happen if you forced a sale after property values had fallen, it's possible that there are other scenarios that you haven't considered. If you're going to renegotiate what you want (which you're already starting to do in regards to who can force a sale) then you probably need separate legal advice.

I'm a little concerned about your idea that you aren't risking any assets, and this is all about protecting your partner's assets. For example, what happens if your partner runs off with the milkman the day after you buy the place, you continue to pay the mortgage on your own for 25 years, the price rockets to £10million, and you want to sell. Does she get half the equity then?

I appreciate my "price halving" and milkman scenarios aren't very likely - I'm not trying to suggest that they are - but I think sometimes it's easier to think about things if you exaggerate them. (I'm pretty sure you understand that given the burning dog and the brother; this is in case somebody else comes along and tells me I'm being unrealistic).

Edit: and to answer your question...

On sale, the solicitor dealing with the sale will take the sale proceeds, pay the mortgage lender first, then pay any other debts secured on the property, then distribute the money to the owners according to the deed of trust. So, the exact distribution depends on what that deed says.

grifferz

antrobus wrote: »

I don't really see why.

Sorry, when I said we were stunned, I did not mean to imply that this outcome was in any way wrong or unexpected once fully understood.

We were stunned in the sense of being confused about what to do next, as we had gone into the meeting with the mistaken impression that having done some research on deeds of trust and writing down all the things we wanted (even the solicitor said she was amazed how much research we had done), things would be pretty simple.

So when she explained that she was advising us to get independent representation it was just a bit shocking that it wasn't going to be so easy, could involve more solicitors, maybe we couldn't do what we wanted to do etc.

After thinking about it, yes, we have been kicking ourselves for wasting this time. We could have gone to the solicitor at the start and got a free half hour to explain this.

Unfortunately the degree of stunning meant that we just felt like we wanted to get out of there and talk about it amongst ourselves, and that led to us forgetting to ask for clarification about the other point, the thing about how exactly the mortgage is discharged upon sale. That was the only reason why I mentioned it. Sorry for misleading!

grifferz

Annisele wrote: »

I'm afraid I'm still with the solicitor on the "you should seek independent advice" point.

I'm certainly coming around to the idea of her seeing another solicitor just to as far as possible avoid any possible future claim that "I only went along with it because you said it would be OK" (not the case, but people do tend to have selective memory in times of great emotional turmoil).

I have already said to her this morning before she went to work that I think I'd feel better if she went to a solicitor with her father just for moral support, to talk it through, then she could get advice purely for her.

As for me..

Annisele wrote: »

I'm a little concerned about your idea that you aren't risking any assets, and this is all about protecting your partner's assets. For example, what happens if your partner runs off with the milkman the day after you buy the place, you continue to pay the mortgage on your own for 25 years, the price rockets to £10million, and you want to sell. Does she get half the equity then?

I was going to say, "ah, but I'd just force a sale!" but of course I had the bright idea of removing that ability from myself, didn't I? Hmm.

I have actually already agreed to make all the mortgage payments though, and she has already agreed to invest her deposit, so technically if she ran away with a milkman it is no additional burden for me to continue paying the mortgage. And yes she should still be entitled to 50%.

She does not get to move the guy in so worst case is I'd be forced to put up with is an unpleasant milkman in my home 13 nights out of every 14. Sounds pretty awkward. This does bear more thinking about.

Annisele wrote: »

I appreciate my "price halving" and milkman scenarios aren't very likely - I'm not trying to suggest that they are - but I think sometimes it's easier to think about things if you exaggerate them. (I'm pretty sure you understand that given the burning dog and the brother; this is in case somebody else comes along and tells me I'm being unrealistic).

Yeah, I understand where you're coming from and I thank you for coming up with these additional worst cases; it has indeed given me things to think about.

Annisele wrote: »

On sale, the solicitor dealing with the sale will take the sale proceeds, pay the mortgage lender first, then pay any other debts secured on the property, then distribute the money to the owners according to the deed of trust. So, the exact distribution depends on what that deed says.

Okay, thank you, that at least means we can mitigate some of her risk there.

You've convinced me that there is still too much that we may have overlooked so I am definitely going to insist that she gets her own solicitor and confirms this point as well as any other horror scenarios they can come up with.

Thrugelmir

With any such agreement a solicitor will recommend that one party seeks independent advice. As the solicitor drafting the agreement is not in a position to represent both parties.

This is the basis of most agreements.

Outstanding mortgage discharged (£100k to lender) and payment of all selling fees.
Partner's deposit repaid if possible (£120k to her)
Remainder if any split equally

While you are paying the mortgage. Her equity could have been earning interest.

grifferz

Thrugelmir wrote: »

While you are paying the mortgage. Her equity could have been earning interest.

She is well aware of what her savings interest amounts to. She didn't get to save that much without keeping an eye on it.

She considers it a fair exchange for a home; it will also result in her no longer having to contribute anything towards rent, and it is of course still a long term investment. That could go down in value, we realise!