commensurate share deed

ro2778

humm, I see what you mean, I'll come back to this soon, thanks

Tom99

ro2778 wrote: »

humm, I see what you mean, I'll come back to this soon, thanks

[FONT=Verdana, sans-serif]Using another example to illustrate the same point. If you assume the mortgage was an interest only one, then I think your formula would not allocate any share to the party paying that mortgage and it would not matter how owner 1 and 2 split the mortgage, all of the equity would go in proportion to the initial deposit and nothing to that element of the purchase price being supplied by the mortgage.

[/FONT] [FONT=Verdana, sans-serif]I think your formula would also need to accommodate when in the ownership period a contribution was made. So if Owner 1 pays the mortgage in year 1 and Owner 2 pays the same amount in year 10, Owner 1 should have accumulated 9 years of growth which Owner 2 would not have done. I suspect your current formula treats both contributions the same.

[/FONT] [FONT=Verdana, sans-serif]You could achieve that by revaluing the property at the end of each month and starting the next month afresh. A straight line between purchase price and sale price could be used to do that.[/FONT]

ro2778

I found this article on a couple asking for help to determine how to calculate equity given unequal shares: https://www.theguardian.com/money/2016/nov/10/how-can-we-calculate-what-we-have-each-contributed-to-our-house

In this, there is an interest only mortgage and because one person didn't pay off any capital, his contribution to interest is disregarded. I take it you would disagree with this advice? I mean... it does seem harsh on the bloke in that relationship! Also they have weighted money spent on a loft conversion as equal to deposit which I very much disagree with. Humm when I started this process I thought there would be some well established formula, didn't realise it would require so much DIY.

ro2778

One of the comments suggests and interesting method

smilerjames 10 Nov 2016 9:57

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We had a similar problem and lawyers weren't great so we drew up our own agreement based on their drafts. Most of these documents and the above example have a flaw IMHO when it comes to relationships, they treat everything as a % of the house forever and create a situation where one person owns more of it than the other.

I drew up the following. We treated deposits and additional payments as loans to a fictional joint entity that held the house together. These personal loans to the joint entity acrue interest just as if they were in the bank - this was done to protect deposits against inflation - while inflation is low currently long term its likely to run at ~2%. If your boyfriend complains about this tell him to go to the bank for his 50% and get a better rate....

These loans are repayed to each of us after the mortgage has been settled. The remainder of the house is then split 50/50. If you stay together for a long time you will get closer to owning 50% each.

This structure allows us to benefit evenly from any price gains while also sharing the risk of falls in house price. Its also protecting our prior savings. We have adjusted the 'loan' part of the document when we have had things like inheritance payments.

We also chose to merge our bank accounts when we bought the house so that we didn't have these persistent arguments about who was contributing what. I earn more so I suggested this - it would appear the ball is in your court here from the figures as you look to have more money than he has. Neither of us are big spenders. I think its a concern that after 10 years together you are still not working together financially.

I have also done a lot of work on our house but my wife contributes other work. I think how you treat his work really depends on whether its meant he earns less money from his day job or whether this has been done in spare time while you are cooking dinner or out partying. Keep in mind that a professional is much faster at a job so you can't expect the same hourly credit for your tiling if you go down this route.

In your case you would have a loan to the joint entity of £126K and he would have one of £22K depending on how you treat his work. Over 10 years your loan has increased to £~150K and his has increased to ~£26.5K.

If the house price is now £400K then after the mortgage is paid off you would have £220K left. You would receive £150K and he would get £26.5K for your respective loans. The remaining £43.5K would be split 50/50. In the end you would get £171.5K and he would get £48K.

If the house price is still £257K then you would each still get £150K and £26.5K. After the mortgage is repaid then there would be £77K left and a deficit of £100K after the personal loans. You would each owe the entity £50K so you would get £100K back and he would in effect owe you £23.5K.

Its important that whatever you do you both share in the risks and rewards. Perhaps more importantly, 10 years on you need to be functioning together as a financial unit rather than planning for separation.

Tom99

ro2778 wrote: »

I found this article on a couple asking for help to determine how to calculate equity given unequal shares: https://www.theguardian.com/money/2016/nov/10/how-can-we-calculate-what-we-have-each-contributed-to-our-house

In this, there is an interest only mortgage and because one person didn't pay off any capital, his contribution to interest is disregarded. I take it you would disagree with this advice? I mean... it does seem harsh on the bloke in that relationship! Also they have weighted money spent on a loft conversion as equal to deposit which I very much disagree with. Humm when I started this process I thought there would be some well established formula, didn't realise it would require so much DIY.

[FONT=Verdana, sans-serif]Yes totally wrong, the boyfriend has put in £20,300 plus 50% of mortgage, £90,000 = £110,300 so his share of any increase in value is a lot more than 15%.[/FONT]

ro2778

More food for thought from comments:

leadballoon 10 Nov 2016 13:46

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It doesn't really matter whether you are married or not, if there are no children or other dependants when you split you want an equitable agreement. I have no idea what the answer above is advocating, on the one hand a "standard" deed of trust example has

if one of you put down £20,000 and the other £10,000, but you split the mortgage equally, on sale and after clearing the mortgage debt, person one would get their £20,000 back, person two, their £10,000 with anything left over being split down the middle.:

Which splits any increase or decrease in the value of what you bought with your loan in half. Yet the example calculation in this case is:

Your total contributions as a couple would be £148,711.38 (ie £126,411.38 plus £22,300), a figure that enables you to calculate the percentage you have each contributed to the value of the property. So your share as a percentage is 85% while your boyfriend’s is 15%. So if you were to sell the property, after paying off the mortgage and paying selling fees, whatever was left over would be split 85:15 in your favour.

Which is completely different because it takes no account of the borrowed capital. Neither example is financially acceptable without taking into account return or risk on the original investment including the amount borrowed.
Your initial investment was purchase price plus buying costs such as stamp duty and solicitor fees. Calculate your contributions as percentages of that. Assuming your mortgage of 180k is serviced equally by both of you, paying half the interest (actually mortgage plus fee but round the figures for the example). That too is a percentage of the original investment. If the proceeds of sale after selling fees has risen over the buying cost by, say, 20% then all percentages are applied as they were at the original investment. So that capital financed by the 180k mortgage as a percentage increased by 36k and you are each due 18k. Your 66k input (in round numbers) increased by about 13k, your boyfriends 20k increased by 4k and so on. If the house value fell, you get a reduced return (possibly owe money as "negative equity") based on the original percentages; that's the risk of investment.

If subsequent improvements have added value, such as the loft conversion, then that adjusts the percentages. Several ways of doing that, You could value the work as if it were done at the time of purchase, that's reasonable if it was planned at that time and done soon after. You could value it as if it were recently completed, just repay it out of the final proceeds. Or, you could try to estimate the value added at some mid point in your ownership. The value of the conversion would increase or decrease as the value of the house changed; base it on a valuation of the house at the time (try one of the property sites such as zoopla if you didn't ask an estate agent at the time) or linearly, say 5 years into your 10 year ownership the increase in that investment is half the overall house value increase.

Contributions in labour, such as plumbing or tiling are harder. If there are specific projects, such as boiler replacement or plumbing for the loft then you could try attributing a cost. Otherwise it may be simpler to treat those as remedying wear and tear which you contributed equally to at the time.

ro2778

I'll come back to this next week, unfortunately I have to work on a less interesting project this weekend!

Tom99

[FONT=Verdana, sans-serif]The 1st example is broadly correct:

[/FONT] [FONT=Verdana, sans-serif]if one of you put down £20,000 and the other £10,000, but you split the mortgage equally, on sale and after clearing the mortgage debt, person one would get their £20,000 back, person two, their £10,000 with anything left over being split down the middle.:

[/FONT] [FONT=Verdana, sans-serif]However what it should say it that the £20,000 and £10,000 each buy a %age share, then on sale each gets the %age share their deposit bought based on the sale price and what's left less the mortgage is split 50/50.[/FONT]

getmore4less

ro2778 wrote: »

I found this article on a couple asking for help to determine how to calculate equity given unequal shares: https://www.theguardian.com/money/2016/nov/10/how-can-we-calculate-what-we-have-each-contributed-to-our-house

In this, there is an interest only mortgage and because one person didn't pay off any capital, his contribution to interest is disregarded. I take it you would disagree with this advice? I mean... it does seem harsh on the bloke in that relationship! Also they have weighted money spent on a loft conversion as equal to deposit which I very much disagree with. Humm when I started this process I thought there would be some well established formula, didn't realise it would require so much DIY.

If we break it down

starting point is relatively easy

boyfriend and I bought a house together for £257,000 plus fees. At the time, I put in around £66,400 and he put in £20,300. Our initial interest-only mortgage was £180,000 plus the arrangement fee of £781.88, which was added to the loan

.

Deposit 1 £66,400 (24.82%)
Deposit 2 £20,300 (07.59%)
Mortgage £180,782 (67.59%)
total cost £267,482

As the mortgage is paid 50:50 that sets the starting shares
58.615% & 41.385%

for example, I recently paid £45,000 for the loft to be converted and we are having difficulty working out what counts and whether the time of contribution makes a difference.

lets deal with that as timing does make a difference.

if it was paid day 1 it would count like the deposit,
if it was paid on the last day it would just be a cash debt against the total.

it will be somewhere in the middle.

There are a couple of relatively simple ways to deal with this,

1. You can reset the clock/equity by doing a virtual sell and buy
you value the place and work out your shares you then add £45k to that value and the person that paid gets that added to their new deposit you then rework the % including any mortgage that's left.
(most people can get their head round that simple approach**)

2. you adjust the debt (no need to value)
Any maintenance/improvements should be paid for at the % of ownership
in this case this £45k should be paid £26,377 and £18,623

You could do this as an interest free loan and leave the mortgage as is or you can change the amount of debt you each service to reflect the debt, you do this by effectively transferring £18,632 of the debt across then work out the new split of the mortgage payment so it is no longer 50:50, in the above example with interest only on £180k it goes from £90k each to £72k & £108k

An easy way to understand that is in your head you each add the amount you owe to the debt and the one that pays takes that off their share of the debt.

You can deal with any work done in this way where one pays more than another either revalue and adjust shares or just adjust the debts.

Overpayments work in a similar way if you adjust the debt % no need to revalue and adjust shares.

The way the maths works with mortgages(both interest only and repayment) as long as you pay the % of the payment that reflects your % of the debt you want to service is just works.

---

** Once you sort out that simple way to deal with the cash injections there is a secondary consideration that can rear up

You might get the I paid £45k for the loft conversion but it added £100k to the value.

getmore4less

Tom99 wrote: »

[FONT=Verdana, sans-serif]The 1st example is broadly correct:

[/FONT] [FONT=Verdana, sans-serif]if one of you put down £20,000 and the other £10,000, but you split the mortgage equally, on sale and after clearing the mortgage debt, person one would get their £20,000 back, person two, their £10,000 with anything left over being split down the middle.:

[/FONT] [FONT=Verdana, sans-serif]However what it should say it that the £20,000 and £10,000 each buy a %age share, then on sale each gets the %age share their deposit bought based on the sale price and what's left less the mortgage is split 50/50.[/FONT]

That's is what you call the "get your money back" model.

This is the equivalent to each lending the other party 1/2 their deposit on an interest only basis.

if you split the mortgage equally then you own 50:50 with a side debt of the difference.

As long as you understand that's what you are doing it is a reasonable approach.