Deed of Trust and Changing Equity

jack900

Hello, FTB here and need help understand the complex maths (for me!) of recording equity in a deed of trust.

Myself and my partner will be putting in £20k and £80k (respectively), and the mortgage will be £200k. I've done some near rounding for simplicity, and ignore fees/taxes for now.

So normally I would expect the equity split to say 40:60 and on circumstance of breakup and sale of property, we would split the proceeds according to respective shares and each pay our share of the mortgage from our share of proceeds.

This seems to cover it all fine as long as the contributions to the mortgage etc. are split equally. Unfortunately however, I don't expect this to be the case.

So if I were to pay £750/mth and my partner £250/mth towards a mortgage how would we reflect the changing equity over time in the deed of trust? What if I don't know the likely contribution payments until after the house purchase is complete.

Any help would be very much appreciated!

ValHaller

The property is worth 300. If you split the mortgage equally, then the shares will indeed be 40:60. But you can make the shares what you want - if you want equal shares, you start by saying each of you will put in 150. So you put in 20 cash plus covering 130 of a mortgage mortgage and your partner puts in 80 cash plus covering 70 of the mortgage.

The equity does indeed change over time, but you don't need to worry about that, you need to think about paying off the mortgage.

The calculation on resale as you are aware is to split the proceeds according to shares of ownership and then each pay your share of the mortgage from your shares of of the sale proceeds.

Pitfalls are

1. You will have to do the share out mathematically rather than by actually sharing out the proceeds of sale. Your selling solicitor will insist on the mortgage lender being paid off first
2. Because of the above some solicitors (being not mathematically inclined) may refuse to do a Trust Deed for you because they cannot comprehend that if they are not allowed to do the share out physically, this does not prevent the calculation being done as though the money was shared out physically. At least one poster has complained of this. Advice is to sack any solicitor who cannot cope with this.
3. As the party providing least equity, if the value of the property drops, you risk negative equity on your share and may end up owing money which would be to your partner. Suppose your had shared 50:50, with you putting in 20 and covering 130 of the mortgage. Suppose too that you only raised 250 on the sale. Your initial share of the proceeds would be 125, which would not cover your share of the mortgage - you would owe 5. If you could not put this in straight away, your partner would have to cover your loss and you would owe them 5

You can reduce the likelihood of negative equity on your share by covering less of the mortgage - this would improve the Loan To Value on your share - while reducing your partners LTV

jack900

ValHaller wrote: »

The property is worth 300. If you split the mortgage equally, then the shares will indeed be 40:60. But you can make the shares what you want - if you want equal shares, you start by saying each of you will put in 150. So you put in 20 cash plus covering 130 of a mortgage mortgage and your partner puts in 80 cash plus covering 70 of the mortgage.

The equity does indeed change over time, but you don't need to worry about that, you need to think about paying off the mortgage.

The calculation on resale as you are aware is to split the proceeds according to shares of ownership and then each pay your share of the mortgage from your shares of of the sale proceeds.

Pitfalls are

1. You will have to do the share out mathematically rather than by actually sharing out the proceeds of sale. Your selling solicitor will insist on the mortgage lender being paid off first
2. Because of the above some solicitors (being not mathematically inclined) may refuse to do a Trust Deed for you because they cannot comprehend that if they are not allowed to do the share out physically, this does not prevent the calculation being done as though the money was shared out physically. At least one poster has complained of this. Advice is to sack any solicitor who cannot cope with this.
3. As the party providing least equity, if the value of the property drops, you risk negative equity on your share and may end up owing money which would be to your partner. Suppose your had shared 50:50, with you putting in 20 and covering 130 of the mortgage. Suppose too that you only raised 250 on the sale. Your initial share of the proceeds would be 125, which would not cover your share of the mortgage - you would owe 5. If you could not put this in straight away, your partner would have to cover your loss and you would owe them 5

You can reduce the likelihood of negative equity on your share by covering less of the mortgage - this would improve the Loan To Value on your share - while reducing your partners LTV

I think I get it - So if we went for 50:50 as above, and then 5 years down the line we have paid off 30k of capital on the mortgage (which I have contributed 75% of), and we break up and sell the house for the same as we bought it (300k). How would the proceeds be split?

RAS

Richard Webster is a lawyer who post on here sometimes.

He posted a very precise calculation he suggested for a couple in this situation

ValHaller

jack900 wrote: »

I think I get it - So if we went for 50:50 as above, and then 5 years down the line we have paid off 30k of capital on the mortgage (which I have contributed 75% of), and we break up and sell the house for the same as we bought it (300k). How would the proceeds be split?

You put in 20 equity and pay off 130 of mortgage, your partner put in 80 equity and pays off 70 of mortgage? You are taking responsibility for 65% of the mortgage.

You each receive 150 of equity (not really - the selling solicitor will see to that). You each pay off your share of the mortgage.

Your share is 130/200, your partner's is 70/200. The mortgage outstanding is 170. You pay back 110.5 and walk away with 39.5. Your partner pays back 59.5 and walks away with 90.5

grifferz

We did what ValHaller suggested for our deed of trust and as ValHaller warned, our solicitor was not at all keen to cope with the maths of it.

We were just persistent and wrote out for them how it would work making sure to show how the mortgage gets discharged first and it still works out, and then they were okay with it.

The template deed they started off with assumed an unequal contribution for deposit (fine) and then an equal monthly contribution of half the mortgage payments each (not fine).

So you can do what you want, just prepare to be persistent about it. To the point of going elsewhere.

jack900

Can anyone tell me how you account for large contributions towards the property (whether it be maintenance/renovation/mortgage overpayments) which aren't known at the time of writing a deed-of-trust?

Thanks,
Jack

jack900

*bumpalump*

grifferz

You do know the sums because the deed of trust can be signed off at the point of exchange, at which point presumably you know who has contributed what to deposit and an initial fund for renovations.

If someone wants to contribute some more later then you could get the deed amended to reflect that before they do so, but this will obviously cost money again.

Richard_Webster

Yes, you can have a deed of trust whereby the eventual net sale proceeds are divided in proportion ot the total of the payments made by each party. This would include contributions to the original capital sums involved and legal costs etc and the mortgage payments. Could even involve how much of the utility bills each pays.

Downside is that you have to keep records so that every 2-3 months and you both sign a record sheet of some sort that says that up to that date A has paid £XXXXX and B £YYYYY. You add uo the contributions each has paid over the next 2-3 months and keep a running total. Then the room for a dispute is limited to the period since the last the totals were agreed.