Declaration of Trust fairest way to set it up

markjamesallen

EssexHebridean said:

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? 

For Party 1 - There is £45,000 at stake.  By doing nothing and being shared tenants 50% of their deposit is protected and 50% is at the mercy of Party 2.
For Party 2 - doing nothing is beneficial. The declaration of trust is only beneficial to Party 1.
I haven’t said I won’t pay £350 for a declaration of trust but I am not prepared to take one out without doing my homework. 

Bookworm105

markjamesallen said:

EssexHebridean said:

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? 

For Party 1 - There is £45,000 at stake.  By doing nothing and being shared tenants 50% of their deposit is protected and 50% is at the mercy of Party 2.
For Party 2 - doing nothing is beneficial. The declaration of trust is only beneficial to Party 1.
I haven’t said I won’t pay £350 for a declaration of trust but I am not prepared to take one out without doing my homework. 

yes party 1 as the deposit payer bears more risk (or more reward) than party 2
that is a matter for negotiation, enmity over money does not make for good bed fellows 

if any consolation, if you get married (and its lasts longer than a "short marriage" - 2 years) then the court will start from 50/50 no matter who put what in 

markjamesallen

markjamesallen said:

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?

Is my maths correct? As I still do not understand why option 1 can be at anytime more beneficial to Party 1.

Bookworm105

markjamesallen said:

markjamesallen said:

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?

Is my maths correct? As I still do not understand why option 1 can be at anytime more beneficial to Party 1.

it is not "at anytime"
where only one person puts up all the deposit then that person bears all of the risk as per the loss scenario of your maths

Exodi

markjamesallen said:

Is my maths correct? As I still do not understand why option 1 can be at anytime more beneficial to Party 1.

@Bookworm105 just did a great reply clarifying this on the previous page.

It's funny because I was very similar to you, I had complicated spreadsheets with percentages and formulas on that I intended to baffle a solicitor with. Despite this I ended up settling on option 1.

Your Maths is correct (and objectively I think the approach of option 2 is fairest) but the problem is practicality. The mortgage lender has first charge on the property, so you must accept that in your example where the house is sold at a £50k loss for £310k, the solicitor will have £50k to divvy up between you once they have satisfied the first charge. In option 2, what you are effectively hoping to do is instruct the solicitor "No, ignore the first charge and hold back an extra £13,750 from the mortgage lender and give it to me instead - then tell the mortgage lender they will need to chase the other person for it" - which I'm sure you can appreciate does not fly.

 As mortgage borrowers you are jointly and severally liable for the whole debt. In this scenario, if you felt party 2 was indebted to you for £13,750, you'd need to reclaim it directly from them.

Bookworm105

Exodi said:

Your Maths is correct (and objectively I think the approach of option 2 is fairest) but the problem is practicality. 

option 3 is fairest, the risk or reward taken by each person is based on the mathematical share of their own wealth they put into the property (so not a 50/50 mortgage split)

a deposit gives the deposit payer a % of ownership based upon deposit / purchase price as the fixed start point

the remainder of the purchase price funded by the mortgage is then split in accordance with the mathematical % of the net income of each mortgage payer.
So if I earn 10% more than you, my mortgage payments are 10% higher than yours. I will thus own 10% more than you, but we each incur the same relative reduction in personal wealth from paying the mortgage and therefore each will gain the same relative profit (or loss) when it is sold. 

option 3 is of course (sadly) practically unworkable in the real world (and utter trite when a divorce occurs) because it needs reworking every time a pay change occurs and so results in a conveyor belt of new declarations of trust 

EssexHebridean

Doing your homework is absolutely sensible. Considering DIYing an important legal document because it will cost £350 plus vat however is probably not. If it comes to needing to invoke the Declaration of Trust, having a watertight document that does where you need to will be of far more value than the amount it cost to have it drawn up. 

markjamesallen

My solicitor told me that option 1 is a better outcome for party 1 if house prices fall as they are protecting the £90,000 deposit. But as Exodi said, the mortgage company has first charge so I don't see how it can be better than option 2, it may be the same as but not better. I think the solicitor is wrong. Where option 2 is better is when prices go up as the deposit enjoys the uplift. Is a declaration of trust required if the Tenants in Common states percentage ownership, in this case Party 1 62.5% and Party 2 37.5%? I have no problem whatsoever in paying the £350 plus vat for a declaration of trust, but I'm not throwing money down the pan if it isn't necessary in this case.
Thank you to all for the help so far.

Exodi

markjamesallen said:

My solicitor told me that option 1 is a better outcome for party 1 if house prices fall as they are protecting the £90,000 deposit. But as Exodi said, the mortgage company has first charge so I don't see how it can be better than option 2, it may be the same as but not better. I think the solicitor is wrong. Where option 2 is better is when prices go up as the deposit enjoys the uplift. Is a declaration of trust required if the Tenants in Common states percentage ownership, in this case Party 1 62.5% and Party 2 37.5%? I have no problem whatsoever in paying the £350 plus vat for a declaration of trust, but I'm not throwing money down the pan if it isn't necessary in this case.
Thank you to all for the help so far.

It's because you're only looking at it in a negative equity-ish type of situation, where yes, both options yield the same result.

If we look at an example where the price decreased, but the devaluation isn't so extreme:

(Again, let's say you bought for £360k, mortgage £270k, party 1 deposit £90k, party 2 deposit £0k, as before.)

Let's say after 5 years you sell the house. The house has devalued to £340k (-£20k), but the mortgage balance has reduced to £240k.

Option 1
Party 1 gets £90k back, + half of remaining equity = £95k
Party 2 gets half equity of remaining equity = £5k.

Option 2
Party 1 gets £212.5k less half o/s mortgage = £92.5k
Party 2 gets £127.5k less half o/s mortgage = £7.5k

This tracks with what your solicitor says that option 1 is better in general for party 1 should house prices fall, whereas option 2 is better should they increase. Hope that helps.

Bookworm105

markjamesallen said:

Is a declaration of trust required if the Tenants in Common states percentage ownership

 I have no problem whatsoever in paying the £350 plus vat for a declaration of trust, but I'm not throwing money down the pan if it isn't necessary in this case.
Thank you to all for the help so far.

the declaration is the only place where the % split is documented. that is the sole purpose in life of that document.
There is no such thing as a "Tenants in Common" ownership/title document showing a split

Land Registry never record what % each person owns, they only record the fact that the property cannot be sold without the permission of another person, aka: "Form A restriction" is on record.
The Land Registry then leaves it up to the other person to sort out their own financial affairs, hence the other person needs a DoT to evidence their claim to their share of the money.