Tenants in Common - best way to split things?

Windsorcastle

My partner and I are buying a property together. She earns far more than me and is contributing £180k deposit. I have £50k to put in. The property costs £400k. The other £170k we are taking out a joint mortgage for.

We are unmarried and the solicitor has suggested we do this as Tenants in Common, rather than joint tenants, and we understand the difference between the 2.

My question is whether it is better to work out the percentages we own from the start, or whether we agree that we both get our respective deposits back when we sell, and then split any equity 50/50.

To work out the percentage, do I say that I am putting in 50k plus 85k (half of mortgage), making my 'share' 135k?

And if we agree that my partner owns 60% or whatever her share turns out to be, does that mean we should also do a 60/40 split of all future costs, mortgage payments, home improvements, bills, etc, to make it fair?

My original plan was to say we'd each get our deposits back, plus 50% of equity, on the understanding that we would share all costs 50/50. However, I don't know whether this would benefit one of us over the other?

I know we need to do a Deed of Trust but I just can't work out what arrangement we should start with - percentages or amounts invested?

Can anyone explain the maths in simple terms please?? Thanks for reading.

DandelionPatrol

Windsorcastle wrote: »

Can anyone explain the maths in simple terms please??

Within reason, you can do whatever shares you like. The only maths you need is percentages and ordinary arithmetic. The difficult bit is getting your heads around this idea:

Either of you can take whatever share of the house you like at the outset. If you want equal shares from unequal deposits, then you just take responsibility for the amount of the mortgage which makes your share up to 50%.

So the house costs 400. She puts in 180 and takes responsibility for 20 of the mortgage. She is now responsible for 200, which is 50%. You put in 50 and take responsibility for 150 of the mortgage. You are now responsible for 200, which is the other 50%. So you can split the proceeds of sale 50-50 and each pay off your share of the mortgage, keeping whatever is left from your share.

So if the property is sold for 500, you both take 250. She pays 20 to the mortgage and walks away with 230. You pay 150 to the mortgage and walk away with 100. Obviously you pay much more for your 150 share of the mortgage, but that is fair because it is the rent on the money to bring your share to 50%

You can do the same trick for any division of ownership you like. The difficulty comes if the house loses value. If it sells for 300, you both take 150. She pays 20 to the mortgage and walks away with 130. You pay 150 to the mortgage and walk away with 0. You both lose 50

If it sells for less than 300, say 200, you both take 100. She pays 20 to the mortgage and walks away with 80. You pay 100 to the mortgage and have to find another 50. You have lost 100 and she has lost 100. In practice, the 50 you have to find will be taken from her 80, so you will owe her 50.

booksurr

the question is not what % share you would own, it is simply a choice between the only 2 options for answering the question what happens when you split up and have to sell the house

if you own shares based on what you invested (ie deposit + 50% of mortgage) so you = (50+85)/400 =33.75% and she has 66.25%, then that means you of each gets the full benefit of any growth in value on the full amount you each invested. Similarly you each suffer the same relative loss if the house decreases. This is the "fairest" option

on the other hand, given the large difference in relative sizes of the deposits, she may prefer the alternate where the Deed of Trust says that the deposits must be reimbursed before any remainder is split between you. It is often preferred by the person with the larger deposit if they are pessimistic and expect values to fall since it better protects their deposit, but also means they do not gain as much if the value rises since you each have a 50/50 stake in the mortgage and therefore each get half of any gain or loss after the deposit is repaid

Obviously this option is fraught with risk if the sales value is not enough to repay the mortgage and also cover refunding both deposits in full . That is where you need your solicitor to ensure the deed of trust covers how the losses are to be shared

Keep_pedalling

Have you also considered what happens if one of you dies? However young you are you, in your situation both of you need wills to avoide the financial mess many unmarried partners get into when intestate rules are applied.

Rambosmum

It depends.

If your partner wants to own 60% of the property then do it that way, as the person with the biggest deposit I'd say it's up to them.

Ownership and percentage of bills paid are two completely separate things. You could own 40% of the property but as you use 50% of the water reasonably be expected to pay 50% of that bill. Same with repairs, decoration etc - as you will both benefit from the increase in sale price should you sell should you not both pay 50% of those costs, or are you going to work out what 40% of the 'benefit' (e.g. increased selling price) is attributable to the repairs and what is due to market values rising?

I'd say for ease ownership should be 33.75% (your 50k + half the mortgage) for you and 66.25% for the other party. And all bills split equally.

Alternatively if you can afford to pay 88% of the mortgage you would then own 50% of the house but for me that would be too much of a financial burden.

HappyMJ

Much easier to hold the property as joint tenants. Too many problems with tenants in common. If you can't trust someone enough to split it fairly on sale then don't buy property together.

You can each get into property ownership by buying individual investment properties in your own names, renting a property together and splitting the rent and bills however you wish.

getmore4less

The way to do it is to work out the equity and debt seperately.

Equity is based on the starting point,(deposit and debt serviced).
Any capital invested into the property is at that % share.

The debt you service is at whatever % you agree and any overpayments at the same %.

you adjust the debt % to get the equity % you want.

You can readjust the debt split without worrying about the equity split.
(you basicaly service your own debt as if it were 2 seperate loans)

When you dispose the equity split is done THEN you pay off the debt you each still owe from your share.

THe math is easy for this but from what we see here with trust deeds beyond alot of solicitors.

keep the running of the place utilities council tax seperate from the ownership.

The easy way to look at this is as if you were renting the place.

with one hat on you are the landlord the other the tenant.



The other way that a lot of people use is the get your money back, split costs 50:50, this is equivilent to an interest free loan for 1/2 the difference in deposit.( not that big an issue when the difference is small but when it is as big as this you do get a less equitable solution, depds if value goes up or down which is best.


Depends how you feel and what you can afford, owning 50:50 can be good but is it means you struggle to pay the bigger mortgage or have less disposable income it may be better to do a different split of equity.


Don't forget the initial split is based on full purchase costs not just the deposit/mortgage.


Then you have to look at all the exit issues, death, kids, getting fed up, cant pay, won't pay...

Windsorcastle

Thanks all for the really helpful posts, that has given me a lot of food for thought, and it is all starting to make more sense now.


It is the solicitor who has told us we should go for Tenants in Common, rather than Joint Tenants, and they have said we should do this and then write wills to state how we wish our respective shares to be dealt with in event of death.


Many thanks all.

Windsorcastle

getmore4less wrote: »

The way to do it is to work out the equity and debt seperately.

Equity is based on the starting point,(deposit and debt serviced).
Any capital invested into the property is at that % share.

The debt you service is at whatever % you agree and any overpayments at the same %.

you adjust the debt % to get the equity % you want.

You can readjust the debt split without worrying about the equity split.
(you basicaly service your own debt as if it were 2 seperate loans)

When you dispose the equity split is done THEN you pay off the debt you each still owe from your share.

THe math is easy for this but from what we see here with trust deeds beyond alot of solicitors.

Thanks getmore4less. I think I get your gist - are you saying that we could split future costs of improvements, etc a different way in order for me to increase my percentage share? Would you be kind enough to give me a 'for instance' example of how this would work please?? Many thanks for your help.

Windsorcastle

DandelionPatrol wrote: »

Within reason, you can do whatever shares you like. The only maths you need is percentages and ordinary arithmetic. The difficult bit is getting your heads around this idea:

Either of you can take whatever share of the house you like at the outset. If you want equal shares from unequal deposits, then you just take responsibility for the amount of the mortgage which makes your share up to 50%.

So the house costs 400. She puts in 180 and takes responsibility for 20 of the mortgage. She is now responsible for 200, which is 50%. You put in 50 and take responsibility for 150 of the mortgage. You are now responsible for 200, which is the other 50%. So you can split the proceeds of sale 50-50 and each pay off your share of the mortgage, keeping whatever is left from your share.

So if the property is sold for 500, you both take 250. She pays 20 to the mortgage and walks away with 230. You pay 150 to the mortgage and walk away with 100. Obviously you pay much more for your 150 share of the mortgage, but that is fair because it is the rent on the money to bring your share to 50%

Thanks DandelionPatrol for going to the trouble of explaining this in detail, and I can completely get my head around it for once! Hmm, lots to think about!