Declaration of Trust fairest way to set it up

markjamesallen

Two brilliant answers from Exodi and Bookworm105 - thank you it is all starting to make sense.

markjamesallen

Exodi said:

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.

I've been crunching the numbers. To take your example where the mortgage balance has reduced to 240k and the house sells for 340k. We see as you say a marginal improvement for Party 1 under option 1. However, keeping the mortgage o/s at 240k, if the sale price is 310k or less the outcome is on paper favourable to Party 1 (I accept in practice Party 2's debt is likely to be absorbed by Party 1, leaving the two options identical. A sale price of 320k leaves 80k to Party 1 and 0k to Party 2 in both options. For sales between 330k and 350k we see a marginal improvement of about a couple of thousand pounds for Party 1 using option 1 over option 2. A 360K sale is identical in both options 105k for party 1 and 15k for party 2. All sales of 370k and above provide an exponential improvement for Party 1 over Party 2 using option 2.

Weighing this up I think it is in Party 1's best interest to go with option 2 and conversely Party 2's best interest is to go with option 1.

By the way I am neither Party 1 or Party 2, I am however emotionally involved as the father of one of the parties. My wife and I never had to think about this, our 21k house in 1984 on a 95% mortgage with a deposit scraped up from somewhere wasn't quite the same.

Exodi

markjamesallen said:

Exodi said:

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.

I've been crunching the numbers. To take your example where the mortgage balance has reduced to 240k and the house sells for 340k. We see as you say a marginal improvement for Party 1 under option 1. However, keeping the mortgage o/s at 240k, if the sale price is 310k or less the outcome is on paper favourable to Party 1 (I accept in practice Party 2's debt is likely to be absorbed by Party 1, leaving the two options identical. A sale price of 320k leaves 80k to Party 1 and 0k to Party 2 in both options. For sales between 330k and 350k we see a marginal improvement of about a couple of thousand pounds for Party 1 using option 1 over option 2. A 360K sale is identical in both options 105k for party 1 and 15k for party 2. All sales of 370k and above provide an exponential improvement for Party 1 over Party 2 using option 2.

Weighing this up I think it is in Party 1's best interest to go with option 2 and conversely Party 2's best interest is to go with option 1.

By the way I am neither Party 1 or Party 2, I am however emotionally involved as the father of one of the parties. My wife and I never had to think about this, our 21k house in 1984 on a 95% mortgage with a deposit scraped up from somewhere wasn't quite the same.

What you're doing right now is fantastic, as whenever discussions around DoT's come up, we always encourage that the method is tested using a variety of scenarios (as it can highlight quirks as discussed earlier).

Of course there is a lot more than just the initial contributions in a deed of trust. To help focus the mind, have they thought about how they would handle renovation or repairs? In option 1 it would seem fair to split them 50:50 as they both gain equally for any house price increases, whereas in option 2, which is effectively a fixed % split, it would seem fairer to split the renovation costs in line with ownership (e.g. why should party 2 pay 50% of an improvement, when they would only gain 37.5% of any subsequent equity increase). 

You could even consider events like childbirth, long term unemployment, etc (though I didn't personally - our long term plan was to use a DoT to protect us in the short term, then get married and have children (effectively replacing the DoT, though it is possible to make DoT's in consideration of these things)).

BikingBud

I feel the comment about short life of these agreements is important. As much as through life events may infer a revision of the original agreement, the purpose appears to be to protect one's assets during the early phase of a relationship. Especially important as purchasing solo is nigh on impossible nowadays and an escape plan is worthwhile if not obligatory when advising a party, as a parent.

It should work and ensure both parties leave with roughly the same proportion as they came. Hence large shift in value due to mortgage reduction or home improvements will push the limits of the modelling that the OP has listed but are not likely in the first few years of shared ownership.

Moreover, once a firmer commitment has evolved and shared holidays, bank accounts, vehicles and ultimately offspring come along the initial deed of trust will have largely been overtaken by events. So modelling is fine but: 

https://en.wikipedia.org/wiki/All_models_are_wrong

markjamesallen

Thank you to Exodi and BikingBud for your last two comments. Having spoken to my daughter tonight she wants to go with protecting the deposit as in option 1. She doesn't like the idea of owning different percentages, "We're in it together and everything else is 50/50". Time should dilute the value and hopefully the necessity of the DoT and the two of them will make it through to a long and happy life together.