URGENT- Unequal deposits and solicitor said the mortgage being paid off first?

IdontknowwhereIam

Hi,
I've read plenty of forms and posts but we've hit a snag with the solicitor and a trust deed.

One of us is putting in all the deposit and one of us isn't putting any in, so the way we want to deal with this is on a share basis, %66 to%33.

We had said that if the house is sold then the house price needs to be split according to % and then the mortgage paid off 50/50. That seems the correct way to do it?

Solicitor says he cannot put that in the trust deed as the mortgage needs paying off first. But this makes the figures seem less great.

I'm a little confused by it. How do we deal with this?

 We are not interested in the deposit being returned and then split 50/50.

Thanks

CSI_Yorkshire

If you're paying the mortgage 50/50 then fixing a 66/33 split based on equity input is unfair in my opinion.

I've explained how I calculate this sort of thing on another thread in the past couple of days - I'll find it and copy/paste.

CSI_Yorkshire

https://forums.moneysavingexpert.com/discussion/comment/80235867 - this is the thread.

Basically, what you want to know when you sell is how much of your resources each has contributed.

On the day of purchase, that is 66/33.  But when you pay the first monthly payment of the mortgage, unless you are paying that also 66/33, the split has changed.  That needs to be accounted for.

Also, what you want to split at the end what you sell is what equity you have in the property.  That means you take the cash from the sale, pay off the mortgage and all the selling fees, and then split the remainder according to whatever the ratio actually is at that time.

IdontknowwhereIam

CSI_Yorkshire said:

If you're paying the mortgage 50/50 then fixing a 66/33 split based on equity input is unfair in my opinion.

I've explained how I calculate this sort of thing on another thread in the past couple of days - I'll find it and copy/paste.

Thanks for your quick reply.

Can you explain why you think it is unfair. Obviously we want to fully understand and make sure it is fair. The way we saw it is -  that £100,000 cannot be used for anything else, such as an investment, as it is tied up in the house, so by increasing it with the value of the house, we were keeping it relevant to 'inflation' as such. £100,000 isn't £100,000 in 20 years time.

What is the calculation for the way you propose to do it? Say, if the house is £400,000. Person A put in £100,000, person B nothing, property increases to £500,000 and we've paid off £100,000 and sell it in 10 years?

This has been boggling our minds for awhile now.

Appreciate your reply, thanks

doodling

Hi,

IdontknowwhereIam said:

[...]

One of us is putting in all the deposit and one of us isn't putting any in, so the way we want to deal with this is on a share basis, %66 to%33.

We had said that if the house is sold then the house price needs to be split according to % and then the mortgage paid off 50/50. That seems the correct way to do it?

[...]

How are you expecting this to work?

As an example, you have a 150k house, someone has put in a £20k deposit, you have paid £10k mortgage payments and have a £125k mortgage remaining.

You want to sell the house, let us say for the same price.

A 66/33% split is 100k/50k.

Out of that the mortgage is paid off 50/50 so one person gets 37.5k and the other puts in another 12.5k to pay off the mortgage.

Are you sure?

Practically of course the mortgage will get paid off when the house is sold so in the example above there is 25k left which you want to "split" so that one party has more than all of it and the other has to put more money in.

You need a formula which will give a result that both parties consider fair no matter when it is needed and no matter what has happened to house prices.

Agreeing that formula should get to the bottom of stuff like who exacty is taking on the risk / benefit of house price changes (the person with the bigger deposit will initially but how quickly does that change)?

CSI_Yorkshire

Ok, so using your numbers (400k purchase, 300k mortgage, 500k sale), and assuming you contribute 50/50 to the mortgage.  What you want to think about is how much of the equity each person owns, not how much of the value.

A puts in 100k at the start and has paid off 50k of the mortgage.  Total equity input 150k
B puts in 0k at the start and has paid off 50k of the mortgage.  Total equity input 50k

A has put in 150k out of 200k so owns 75% of the equity.  You have given this person a 66% share.
B has put in 50k out of 200k so owns 25% of the equity.  You have given this person a 33% share.

You sell at 500k after selling costs.  Pay off the remaining mortgage with this money (200k) and there is 300k of cash left over.

This is what you split 75:25.  A gets 225k for their 150k input.  B gets 75k for their 50k input.

Think about what would happen if you sold on the day you bought (and made 0 profit or loss).  If you agreed 66:33 fixed split, then A would get 66k for their 100k input, and B would get 33k for their 0k input.  Obviously unfair.  The actual share on that day would need to be 100:0, as I think you would agree.

Then look at the day the mortgage is paid off.  A has put in 100k + 150k.  B has put in 150k.  That puts the share for A at 62.5% and B at 37.5%.

The share changes over time - agreeing a fixed share means that on an early sale the person with the higher contribution loses out and on a later sale the person with the lower contribution loses out.

housebuyer143

As others have said, it's normally only the equity that is split as per your requirements, the mortgage is always paid off first before any split and then the rest is given to you in the percentage agreed in the trust deed. The mortgage is always paid from the sale proceeds by the solicitor so if the price drops, you will probably lose out because you are the only one with money down. 
The mortgage is a debt so that should not be counted into the split. 
That being said, you are better off writing it as in you get your deposit back first and then a percentage of whatever is left. Otherwise you split in 2 years and they are getting 33% of you £100k (or whatever you put in).

saajan_12

IdontknowwhereIam said:

CSI_Yorkshire said:

If you're paying the mortgage 50/50 then fixing a 66/33 split based on equity input is unfair in my opinion.

I've explained how I calculate this sort of thing on another thread in the past couple of days - I'll find it and copy/paste.

Thanks for your quick reply.

Can you explain why you think it is unfair. Obviously we want to fully understand and make sure it is fair. The way we saw it is -  that £100,000 cannot be used for anything else, such as an investment, as it is tied up in the house, so by increasing it with the value of the house, we were keeping it relevant to 'inflation' as such. £100,000 isn't £100,000 in 20 years time.

What is the calculation for the way you propose to do it? Say, if the house is £400,000. Person A put in £100,000, person B nothing, property increases to £500,000 and we've paid off £100,000 and sell it in 10 years?

This has been boggling our minds for awhile now.

Appreciate your reply, thanks

Firstly, its entirely up to you both, there's no 'right' answer. I agree I would want to account for 'time value' of money, ie the 100k deposit is worth more than 100k worth of mortgage payments over the next several years. However that's accounted for in the mortgage interest rate. So using your numbers, 
A puts in 100k deposit + 150k via mortgage (50% of monthly payments)
B puts in 0 deposit + 150k via mortgage (50% of monthly payments)
(The 150k is actually more than that due to interest, but each only gets credit for the 150k.)

So A has 250/400 = 62.5% of sale price and 50% of mortgage liability out of that
B has 150/400 = 37.5% of sale price and 50% of mortgage liability out of that

If the value increases to 500k, and if 100k is paid off the mortgage at the point of sale leaving 200k balance, then 
A has 62.5% x 500k = 312.5k from sale price and pays off 50% of the 200k mortgage balance = £212.5k net
B has 37.5% x 500k = 187.5k from sale price and pays off 50% of the 200k mortgage balance = £87.5k net
The difference is £125k, which is effectively the growth on the 100k difference in contribution. 

For your solicitor, could they write in something to say that the mortgage balance will be paid first. Then the equity will be split as follows: 
A gets sale price x 62.5% - mortgage balance x 50%
B gets sale price x 37.5% - mortgage balance x 50%
If either calculation results in a negative number, then they get 0, and agree to pay the negative amount to the other party separately. 

CSI_Yorkshire

saajan_12 said:

IdontknowwhereIam said:

CSI_Yorkshire said:

If you're paying the mortgage 50/50 then fixing a 66/33 split based on equity input is unfair in my opinion.

I've explained how I calculate this sort of thing on another thread in the past couple of days - I'll find it and copy/paste.

Thanks for your quick reply.

Can you explain why you think it is unfair. Obviously we want to fully understand and make sure it is fair. The way we saw it is -  that £100,000 cannot be used for anything else, such as an investment, as it is tied up in the house, so by increasing it with the value of the house, we were keeping it relevant to 'inflation' as such. £100,000 isn't £100,000 in 20 years time.

What is the calculation for the way you propose to do it? Say, if the house is £400,000. Person A put in £100,000, person B nothing, property increases to £500,000 and we've paid off £100,000 and sell it in 10 years?

This has been boggling our minds for awhile now.

Appreciate your reply, thanks

Firstly, its entirely up to you both, there's no 'right' answer. I agree I would want to account for 'time value' of money, ie the 100k deposit is worth more than 100k worth of mortgage payments over the next several years. However that's accounted for in the mortgage interest rate. So using your numbers, 
A puts in 100k deposit + 150k via mortgage (50% of monthly payments)
B puts in 0 deposit + 150k via mortgage (50% of monthly payments)
(The 150k is actually more than that due to interest, but each only gets credit for the 150k.)

So A has 250/400 = 62.5% of sale price and 50% of mortgage liability out of that
B has 150/400 = 37.5% of sale price and 50% of mortgage liability out of that

If the value increases to 500k, and if 100k is paid off the mortgage at the point of sale leaving 200k balance, then 
A has 62.5% x 500k = 312.5k from sale price and pays off 50% of the 200k mortgage balance = £212.5k net
B has 37.5% x 500k = 187.5k from sale price and pays off 50% of the 200k mortgage balance = £87.5k net
The difference is £125k, which is effectively the growth on the 100k difference in contribution. 

For your solicitor, could they write in something to say that the mortgage balance will be paid first. Then the equity will be split as follows: 
A gets sale price x 62.5% - mortgage balance x 50%
B gets sale price x 37.5% - mortgage balance x 50%
If either calculation results in a negative number, then they get 0, and agree to pay the negative amount to the other party separately. 

Your suggested method falls into the same trap.  If the property was re-sold immediately, the fixed split would cause unnecessary issues.  Split the equity, don't split the value.

saajan_12

CSI_Yorkshire said:

saajan_12 said:

IdontknowwhereIam said:

CSI_Yorkshire said:

If you're paying the mortgage 50/50 then fixing a 66/33 split based on equity input is unfair in my opinion.

I've explained how I calculate this sort of thing on another thread in the past couple of days - I'll find it and copy/paste.

Thanks for your quick reply.

Can you explain why you think it is unfair. Obviously we want to fully understand and make sure it is fair. The way we saw it is -  that £100,000 cannot be used for anything else, such as an investment, as it is tied up in the house, so by increasing it with the value of the house, we were keeping it relevant to 'inflation' as such. £100,000 isn't £100,000 in 20 years time.

What is the calculation for the way you propose to do it? Say, if the house is £400,000. Person A put in £100,000, person B nothing, property increases to £500,000 and we've paid off £100,000 and sell it in 10 years?

This has been boggling our minds for awhile now.

Appreciate your reply, thanks

Firstly, its entirely up to you both, there's no 'right' answer. I agree I would want to account for 'time value' of money, ie the 100k deposit is worth more than 100k worth of mortgage payments over the next several years. However that's accounted for in the mortgage interest rate. So using your numbers, 
A puts in 100k deposit + 150k via mortgage (50% of monthly payments)
B puts in 0 deposit + 150k via mortgage (50% of monthly payments)
(The 150k is actually more than that due to interest, but each only gets credit for the 150k.)

So A has 250/400 = 62.5% of sale price and 50% of mortgage liability out of that
B has 150/400 = 37.5% of sale price and 50% of mortgage liability out of that

If the value increases to 500k, and if 100k is paid off the mortgage at the point of sale leaving 200k balance, then 
A has 62.5% x 500k = 312.5k from sale price and pays off 50% of the 200k mortgage balance = £212.5k net
B has 37.5% x 500k = 187.5k from sale price and pays off 50% of the 200k mortgage balance = £87.5k net
The difference is £125k, which is effectively the growth on the 100k difference in contribution. 

For your solicitor, could they write in something to say that the mortgage balance will be paid first. Then the equity will be split as follows: 
A gets sale price x 62.5% - mortgage balance x 50%
B gets sale price x 37.5% - mortgage balance x 50%
If either calculation results in a negative number, then they get 0, and agree to pay the negative amount to the other party separately. 

Your suggested method falls into the same trap.  If the property was re-sold immediately, the fixed split would cause unnecessary issues.  Split the equity, don't split the value.

No, I explained exactly how based on the sale price and mortgage balance at the point of sale. 
For a sale the next day, value = 400k split 62.5 / 37.5 and mortgage balance = 300k, split 50/50. 
A gets 62.5% x 400k sale price less half the mortgage balance 50% x 300k = 250k - 150k = 100k
B gets 37.5% x 400k sale price less half the mortgage balance 50% x 300k = 150k - 150k = 0
Where's the trap?

You can't (reasonably) split the equity unless you're going to re-write the formula every month, which gets ridiculous. 

CSI_Yorkshire

saajan_12 said:

CSI_Yorkshire said:

saajan_12 said:

IdontknowwhereIam said:

CSI_Yorkshire said:

If you're paying the mortgage 50/50 then fixing a 66/33 split based on equity input is unfair in my opinion.

I've explained how I calculate this sort of thing on another thread in the past couple of days - I'll find it and copy/paste.

Thanks for your quick reply.

Can you explain why you think it is unfair. Obviously we want to fully understand and make sure it is fair. The way we saw it is -  that £100,000 cannot be used for anything else, such as an investment, as it is tied up in the house, so by increasing it with the value of the house, we were keeping it relevant to 'inflation' as such. £100,000 isn't £100,000 in 20 years time.

What is the calculation for the way you propose to do it? Say, if the house is £400,000. Person A put in £100,000, person B nothing, property increases to £500,000 and we've paid off £100,000 and sell it in 10 years?

This has been boggling our minds for awhile now.

Appreciate your reply, thanks

Firstly, its entirely up to you both, there's no 'right' answer. I agree I would want to account for 'time value' of money, ie the 100k deposit is worth more than 100k worth of mortgage payments over the next several years. However that's accounted for in the mortgage interest rate. So using your numbers, 
A puts in 100k deposit + 150k via mortgage (50% of monthly payments)
B puts in 0 deposit + 150k via mortgage (50% of monthly payments)
(The 150k is actually more than that due to interest, but each only gets credit for the 150k.)

So A has 250/400 = 62.5% of sale price and 50% of mortgage liability out of that
B has 150/400 = 37.5% of sale price and 50% of mortgage liability out of that

If the value increases to 500k, and if 100k is paid off the mortgage at the point of sale leaving 200k balance, then 
A has 62.5% x 500k = 312.5k from sale price and pays off 50% of the 200k mortgage balance = £212.5k net
B has 37.5% x 500k = 187.5k from sale price and pays off 50% of the 200k mortgage balance = £87.5k net
The difference is £125k, which is effectively the growth on the 100k difference in contribution. 

For your solicitor, could they write in something to say that the mortgage balance will be paid first. Then the equity will be split as follows: 
A gets sale price x 62.5% - mortgage balance x 50%
B gets sale price x 37.5% - mortgage balance x 50%
If either calculation results in a negative number, then they get 0, and agree to pay the negative amount to the other party separately. 

Your suggested method falls into the same trap.  If the property was re-sold immediately, the fixed split would cause unnecessary issues.  Split the equity, don't split the value.

You can't (reasonably) split the equity unless you're going to re-write the formula every month, which gets ridiculous. 

Percentage owned by A = (Initial equity from A + 50% of change in mortgage balance) / (Total initial equity + total change in mortgage balance)

No rewrites needed and works with the normal process that solicitors and lenders use.

saajan_12 said:

If either calculation results in a negative number, then they get 0, and agree to pay the negative amount to the other party separately. 

This is the unnecessary complication.- particularly as the mortgage is paid off on sale before anything is even available to split.