Two Different Sized Deposit Contributions

MoneyMan01

Before getting involved in the purchase of the propert I think I'm doing the right thing in looking ahead as it would be such a huge financial commitment.

If I was to purchase a property with a sibling for both of us to live in, but both contributing different sized deposits.

Let's say person A is contributing 80% and person B is contributing 20%. Both would be going 50/50 on monthly mortgage payments and bills etc.

What would happen in the event one of us was to move out?

I guess the question would be whether the person moving out needed the cash in which case, I imagine then we would have to sell? Regardless of whether either of us wanted to stay in that property?

What options are there if one person wanted to stay? What happens about price rising / falling of the property?

Basically, what options / what would happen if one person wanted to move out?

Secondly, how would the split work in terms of the financial aspect if one wanted to move out?

moneysavinghero

If one person wants to move out you would sell the property. If one of you wants to stay then they buy the property (would only need to buy out the other person). If no one wants to stay you sell on the open market and split the proceeds. If prices rise you will both make money, If prices fall you will both lose money.

How about you make the maths simple. Person A lends person B 30% of the deposit at the start. Now you both are putting in 50% and both paying 50% of the mortgage. So you both would own 50% of the house and would be due 50% of whatever the house sells for when you come to sell. Person A charges person B interest on the 30% deposit amount and person B pays this monthly to person A. When house sells and person B gets their 50% they can pay back whatever capital is outstanding to person A (provided the property has gone up in value - it might not and there may not be any money left after paying the mortgage off, so person B would be in debt to you)

MoneyMan01

Good suggestion. 

The only thing that points out there is whoever is putting say 80% in is taking the higher risk (should house prices fall). Whilst the person with 20% deposit, yes has to pay a % as loan, but is getting a better deal as their capital is not taking a higher risk as the 80%.

Also, when you say that if one of us wanted to stay and we would have to “buy the other person out” what exactly would that mean? Half the house value? Half of what’s remaining on the mortgage? Their deposit back? 

moneysavinghero

You would both be putting in 50% so would be have the same risk in regards to whether you lose money on the house or not. Person A would also have the risk that Person B might stop paying the loan back - thats a separate risk, your condition of the loan would be that if on selling the house they don't make enough to pay back your capital they would still have to pay it back over time. Do you trust your sibling to do that?

Buy the other person out = you get a 2 or 3 estate agents to value the property, take the average of those prices, and then other person would have to pay 50% of that price.

So for example you buy a house for £200,000 with a 10% deposit of £20,000. Both of you put in deposits of £10,000.
in 2 years time Person B wants to leave. House gets valued at £215,000. Each of you owns half the house worth £107,500 and each of you owes the mortgage company £90,000. £107,500 minus £90,000 = £17,500 is the sum person A pays to person B to buy out their share. Person B could then use that to pay you back whatever they loaned from you for your deposit.

* The sum you owe the mortgage company won't actually be £90,000 it would be less as you would have made 2 years of repayments by then.

moneysavinghero

Or if you just did it with 80% and 20% deposits:

You buy a house for £200,000 with a 10% deposit of £20,000. Person A puts in deposit of £16,000. Person B puts in deposit of £4,000.

In 2 years time Person B wants to leave. House gets valued at £215,000.
£180,000 is owed to the mortgage company of which you have both contributed equally to repayments
£215,000 - £180,000 = £35,000 equity of which Person A is due 80% and person B is due 20%
Person A pays person B 20% of £35,000 = £7,000

Or if Person B wanted to Buy out person A it would cost them .£28,000


* The sum you owe the mortgage company won't actually be £180,000 it would be less as you would have made 2 years of repayments by then.

** The above assumes you would be able to afford the full mortgage on your own. If not you would have to sell and after selling A would get £28,000 and B would get £7,000 from the proceeds.

moneysavinghero

What if the house drops in value?

In 2 years time Person B wants to leave. House gets valued at £170,000.
£180,000 is owed to the mortgage company of which you have both contributed equally to repayments
£170,000 - £180,000 = £10,000 of negative equity of which Person A is liable for 80% and person B is liable for 20%
Person B pays person A 20% of £10,000 = £2,000 (they have to pay £2,000 to leave, they lose £6,000 in total)

getmore4less

There are 2 main options 

1. Get your money back
   this is the same as lending the other person 1/2 the difference, own 50:50
2. equitable shares
   you work out how much you own based on the deposit an share of the mortgage.
   eg with a 10% deposit shared 80:20 mortgage 50:50 you own 53% 47%  (less 1/2 outstanding mortgage)

You can modify the second option to have the one with the smaller deposit pay more of the mortgage to balance it up.


The second option is the fairer one as it reflects the value of what you have bought in proportion so work for both rises and falls.


Many forget it is total cost of buying that needs to be counted not just the cost of the property.


either way it is not 80:20 as is being suggested.

MovingForwards

You want a declaration of trust drawn up setting out deposit paid by each, how the equity will be apportioned and what will happen if one wants to move out / sell the property.

Can either of you afford this property on a single income? If not the only option will be to sell, which could impact the relationship with the other sibling especially if they don't want to.

Doozergirl

There are so many threads on this board about the difficulties involved in getting a sibling/friend/ex-partner to move out of a house and sell up when only one party wants to.    I would seriously consider your options if this is not a life-plan for you to live together long term.  How long before one of you finds a life-partner and wants to move, potentially leaving one single sibling being forced to move but unable to afford such a nice place by themselves?  Presumably if you could both afford to live separately, you probably would?

I've read enough posts that our wills now stipulate that any property we own is to eventually be sold and the funds distributed between our two children.  They will not inherit a house for them to fight over because one was already living in it or moved into it, effectively landing the other child as an unwilling landlord.  It leaves them with the choice of being trapped or having to take their own sibling to court at great cost.      

If this is a very long term plan, then it might be a little different, but things can change quickly and there's always one person significantly put out financially.  

silvercar

Doozergirl said:

There are so many threads on this board about the difficulties involved in getting a sibling/friend/ex-partner to move out of a house and sell up when only one party wants to.    I would seriously consider your options if this is not a life-plan for you to live together long term.  How long before one of you finds a life-partner and wants to move, potentially leaving one single sibling being forced to move but unable to afford such a nice place by themselves?  Presumably if you could both afford to live separately, you probably would?

I've read enough posts that our wills now stipulate that any property we own is to eventually be sold and the funds distributed between our two children.  They will not inherit a house for them to fight over because one was already living in it or moved into it, effectively landing the other child as an unwilling landlord.  It leaves them with the choice of being trapped or having to take their own sibling to court at great cost.      

If this is a very long term plan, then it might be a little different, but things can change quickly and there's always one person significantly put out financially.  

Not disagreeing, but this brings its own problems. If unfortunately one person died young, they would need to sell the family home in order to provide money to the children, at the same time as wanting to retain some structure for the children. Even if the children are adults, they may not want to sell the family home until they are older.

MoneyMan01

getmore4less said:

There are 2 main options 

1. Get your money back
   this is the same as lending the other person 1/2 the difference, own 50:50
2. equitable shares
   you work out how much you own based on the deposit an share of the mortgage.
   eg with a 10% deposit shared 80:20 mortgage 50:50 you own 53% 47%  (less 1/2 outstanding mortgage)

You can modify the second option to have the one with the smaller deposit pay more of the mortgage to balance it up.


The second option is the fairer one as it reflects the value of what you have bought in proportion so work for both rises and falls.


Many forget it is total cost of buying that needs to be counted not just the cost of the property.


either way it is not 80:20 as is being suggested.

So with option 2, I think this seems the most logical and fair way when entering something like this.

How did you break down the maths of the 53% / 47% split based on 80:20 Deposit / 50:50 Mortgage payments?

Also, when you say total cost of buying, I thought the deposit would only be towards the actual property price?

What else would contribute to "total costs"? Solicitors etc?

The plan would be to pay for solicitors etc. 50:50, just the deposit itself wouldn't be 50:50 as we both have vastly different amounts saved up.

I don't really understand how the % equitable share split would be worked out in full depth with the actual calculation that needs to be applied?