Declaration of Trust fairest way to set it up

markjamesallen

What is the fairest way to set up a declaration of trust? 

Two parties - house cost 360k

Party 1 deposit 90k (25%)
Party 2 0k (0%)
Mortgage 270k (75%)

Option 1
House sale proceeds minus outstanding mortgage
First 90k to Party 1
Balance split 50/50 between both parties

Option 2
House sale proceeds split 62.5% party 1, 37.5% party 2
Less - each party splitting the outstanding mortgage 50/50

Also, is there a fair way to add a negative equity clause?

A solicitor wants £350 plus vat to do this, is that fair, or is it simple enough to do an online one?

NB - Both parties contributing 50/50 to mortgage, house management costs, living expenses etc.
Both parties on similar salaries.

Thank you

Southend_2

What's fairest is ultimately up to the two of you. My partner and I went for option 1 as it gave me some security over my deposit contribution without the potential complications of option 2 arising from e.g. money ploughed into home improvements over the years. It suited us to do it that way.

markjamesallen

Southend_2 said:

What's fairest is ultimately up to the two of you. My partner and I went for option 1 as it gave me some security over my deposit contribution without the potential complications of option 2 arising from e.g. money ploughed into home improvements over the years. It suited us to do it that way.

I don't understand why option 1 provides more security for the deposit (the solicitor said this as well). Presumably if there is no equity in the property due to a downturn in house prices then the deposit is lost and party 2 can't be made to share that loss and they'd have no means of paying if they were. If the property sells for the same price as it was bought for then both options recover the full deposit. 

Southend_2

markjamesallen said:

Southend_2 said:

What's fairest is ultimately up to the two of you. My partner and I went for option 1 as it gave me some security over my deposit contribution without the potential complications of option 2 arising from e.g. money ploughed into home improvements over the years. It suited us to do it that way.

I don't understand why option 1 provides more security for the deposit (the solicitor said this as well). Presumably if there is no equity in the property due to a downturn in house prices then the deposit is lost and party 2 can't be made to share that loss and they'd have no means of paying if they were. If the property sells for the same price as it was bought for then both options recover the full deposit. 

With option one, I wouldn't lose out if the property was sold at a lower price than we bought it. On the other hand if we sold years later and prices were much higher I wouldn't get the benefit of the increase. In our case, the intention is to get married in a few years so it was more about having some short term security in case we split before marriage. That made option 1 more appealing to me, but also we felt was fairer in the longer term if we don't marry as what each of us gets come sale time would reflect improvements done over the years. Hope that makes sense! As i say though it's a personal decision and you need to do what you're both happy with in your own situation.

markjamesallen

With option one, I wouldn't lose out if the property was sold at a lower price than we bought it.

That's the bit I don't get. Surely you would lose out if the equity didn't cover your deposit.

Southend_2

markjamesallen said:

With option one, I wouldn't lose out if the property was sold at a lower price than we bought it.

That's the bit I don't get. Surely you would lose out if the equity didn't cover your deposit.

Yes, but by less than if nothing had been paid off the mortgage and less than under option 2

markjamesallen

Yes, but by less than if nothing had been paid off the mortgage and less than under option 2

Option 1
House sale proceeds minus outstanding mortgage
First 90k to Party 1
Balance split 50/50 between both parties

Option 2
House sale proceeds split 62.5% party 1, 37.5% party 2
Less - each party splitting the outstanding mortgage 50/50

Let's say the property sold for £310,000 (£50,000 less than purchase price) and the mortgage had decreased to £260,000 o/s.

Option 1
£310,000 - 260,000 = £50,000
Party 1 gets £50,000, Party 2 gets £0.

Option 2
House sale £310,000 split
Party 1 62.5% £193,750
Party 2 37.5% £116,250
Each to pay o/s mortgage equally at £130,000 each
Party 1 is left with £63,750
Party 2 has £13,750 to find to clear their half of the mortgage

If party 2 has no money then party 1 will have to pay £13,750 leaving £50,000

Where am I going wrong?

Southend_2

markjamesallen said:

Yes, but by less than if nothing had been paid off the mortgage and less than under option 2

Option 1
House sale proceeds minus outstanding mortgage
First 90k to Party 1
Balance split 50/50 between both parties

Option 2
House sale proceeds split 62.5% party 1, 37.5% party 2
Less - each party splitting the outstanding mortgage 50/50

Let's say the property sold for £310,000 (£50,000 less than purchase price) and the mortgage had decreased to £260,000 o/s.

Option 1
£310,000 - 260,000 = £50,000
Party 1 gets £50,000, Party 2 gets £0.

Option 2
House sale £310,000 split
Party 1 62.5% £193,750
Party 2 37.5% £116,250
Each to pay o/s mortgage equally at £130,000 each
Party 1 is left with £63,750
Party 2 has £13,750 to find to clear their half of the mortgage

If party 2 has no money then party 1 will have to pay £13,750 leaving £50,000

Where am I going wrong?

AIUA the deed wouldn't normally be written like that in option 2. Party 2 would be left with nothing and party 1 would be left with £50k. So proportionally party 2 is worse off.

Bookworm105

markjamesallen said:

Southend_2 said:

What's fairest is ultimately up to the two of you. My partner and I went for option 1 as it gave me some security over my deposit contribution without the potential complications of option 2 arising from e.g. money ploughed into home improvements over the years. It suited us to do it that way.

I don't understand why option 1 provides more security for the deposit (the solicitor said this as well). Presumably if there is no equity in the property due to a downturn in house prices then the deposit is lost and party 2 can't be made to share that loss and they'd have no means of paying if they were. If the property sells for the same price as it was bought for then both options recover the full deposit. 

the house will "never" reach value zero so there will "always" be some money from the sale

option 1 means the deposit is first dibs on money left (after clearing any mortgage) from the sale, and therefore provides "more" security since in the event of house price dips the deposit is still repaid from the sale proceeds and only then will the remainder (if any) be split.

option 2 exposes both parties to "full value" (more risk) whether the price increases or decreases. Party 2's loss is limited to what party 2 paid via mortgage towards their 37.5%, whereas party 1 loses both their mortgage payments and (some/all) of their deposit.
The obverse of course being if prices rise then party 1 gets better benefit from the fact they own more of the equity than party 2

EssexHebridean

There is £360k at stake here - does £350 for a document which will actual do what it needs to and protect both your interests really sound like too much money? 

theoretica

Both options are pretty similar if there isn't much more than the initial equity to split.  If a lot of the mortgage has been paid off, or the house has risen a lot in value then in option 2 party 1 will benefit considerably.  I think it worth considering that this scenario is more likely to occur after a longer cohabitation, so you are less deciding what you want to happen after 1 year, and more what you might want after ten years - and when the initial divisions are more likely to have been muddled by sickness, inheritance, higher paying jobs, parental leave...