Thoughts appreciated about a break up and mortgage scenario

Tarama

Thoughts appreciated about a break up and mortgage  scenario

 

Hello

Looking for thoughts about the following situation – I am not familiar with this thread so forgive me if this has already been discussed of if this is not the correct thread.

 

The situation is a couple in a relationship (not married) bought a house 3 and a half years ago.  They paid the mortgage equally.  The mortgage was £235,000 and they were able to get a 5 year fixed rate mortgage, at a really good rate.   They put down a £80,000 deposit and one of the couple paid  84% deposit and one a 16% deposit.  They had a declaration of trust drawn up for this.  The relationship has broken down and the person who put down the 84% deposit wants to buy  the other person out.

 

The house valuation by an estate agent shows the value of the property has increased by £55,000.  The couple will of course use a solicitor here.  But it would be helpful to understand this situation a little.

 

First, can the mortgage be taken over by the person who wishes to buy the other person out?   Do lenders permit this?  Or does this mean a remortgage and payment of early repayment charges?

 

Second, what way is the payment to the person who is being bought out work?  That is how is it calculated.

 

Any thoughts about this would be really helpful.  Thank you.

Hoenir

Welcome. Always best to explain your situation fully and ask whatever questions you want in order that you obtain a full understanding. While situations and circumstances can be similar they can differ. 

The person who wishes to remain in the property will need to apply for and obtain a mortgage in their own right, i.e. meet affordability criteria etc. There's no taking the mortgage over. The primary reasoning behind this is that the other party would remain liable should payment of the mortgage be defaulted on. Credit history trashed. A financial connection remaining which may stop their moving on with their own lives. 

The existing lender may possibly allow the existing mortgage product to be transferred into the sole name. Avoiding ERC's etc. Something to enquire about.

Will a further advance be required to fund the buyout? 

Solicitor will handle the Transfer of Equity as part of the remortgage process into the sole name. Disbursing the monies to the non resident party upon completion of the remortgage. 

MWT

Tarama said:

First, can the mortgage be taken over by the person who wishes to buy the other person out?   Do lenders permit this?  Or does this mean a remortgage and payment of early repayment charges?

If that person can meet the lenders affordability criteria on their own, then yes it can be permitted.

Tarama said:

Second, what way is the payment to the person who is being bought out work?  That is how is it calculated.

What was written in the declaration of trust?

Failing that then you might consider the following:

At at the point of purchase (using round numbers) 84% of the deposit purchased 21% of the property.

16% of the deposit purchased 4% of the property.

The mortgage 'owns' 75% of the property.

At the point of separation, the payment of the mortgage has earned each party an equal share in the property to the extent that the mortgage has been reduced.

So take the value of the property now and the person buying out the other will owe them 4% of the new value for their deposit, plus an equal share of the residue after deducting the remaining mortgage from 75% of the current property value.

BikingBud

MWT said:

Tarama said:

First, can the mortgage be taken over by the person who wishes to buy the other person out?   Do lenders permit this?  Or does this mean a remortgage and payment of early repayment charges?

If that person can meet the lenders affordability criteria on their own, then yes it can be permitted.

Tarama said:

Second, what way is the payment to the person who is being bought out work?  That is how is it calculated.

What was written in the declaration of trust?

Failing that then you might consider the following:

At at the point of purchase (using round numbers) 84% of the deposit purchased 21% of the property.

16% of the deposit purchased 4% of the property.

The mortgage 'owns' 75% of the property.

At the point of separation, the payment of the mortgage has earned each party an equal share in the property to the extent that the mortgage has been reduced.

So take the value of the property now and the person buying out the other will owe them 4% of the new value for their deposit, plus an equal share of the residue after deducting the remaining mortgage from 75% of the current property value.

Can you explain those numbers please?

I get:

Return of deposit: 
Deposit £80000/£235000 ~ 34% LTV1 with 84:16 just split it at that ratio 
£80000*0.84= £67,200.00
£80000*0.16=£12,800.00  

Split of uplift £55k
50:50 as mortgage equally paid > £27500 each



Party 1 gets 27500+67200=£94,700 
Party 2 gets 27500+12800=£40,300

Mortgage was £155000 ~ 66% not 75% see LTV1 above, this was the case at purchase so likely the mortgage capital has reduced over 3+ years but this reduced mortgage capital is the debt that the Party 1 will need to cover via rearranged mortgage M2

So difference in mortgage which is now capital in the house > (155000-M2)/2

Party 1 would need to pay Party 2  > (£40,300 + (155000-M2)/2)

But am happy to be corrected.

housebuyer143

I suppose it's what can be agreed as to how it's split. If the property has grown by 55k, what was the agreement for this in the declaration of trust? This would normally detail ownership, is it 50/50 once they get their money back or is it percentage split? 

 If it wasn't mentioned then if it were me and I paid half the mortgage I would probably want half the increased equity, plus my deposit back. BUT the other person really should get off the mortgage if they are not living there, hence why I say it's a negotiation. Both parties need to agree and the person staying needs to get a mortgage in their own right. 

MWT

BikingBud said:

Can you explain those numbers please?

I get:

Return of deposit: 
Deposit £80000/£235000 ~ 34% LTV1 with 84:16 just split it at that ratio 
£80000*0.84= £67,200.00
£80000*0.16=£12,800.00  

Split of uplift £55k
50:50 as mortgage equally paid > £27500 each

Mortgage was £235k + deposit £80k = Purchase price £315k ... so deposit covered 25.39% of the purchase...

Simply returning the deposit does not recognise the growth in the portion of the property paid for with that deposit...

Paying the mortgage did not equal all of the growth in value of the property, only the portion represented by the mortgage...

Tarama

Hello 

thank you all for your responses. This is helping in trying to understand this compex and vexatious situation. 

Hoenir you state - 

"The existing lender may possibly allow the existing mortgage product to be transferred into the sole name. Avoiding ERC's etc. Something to enquire about.

Will a further advance be required to fund the buyout? 

Solicitor will handle the Transfer of Equity as part of the remortgage process into the sole name. Disbursing the monies to the non resident party upon completion of the remortgage"

What the aim is - is that the lender will allow the existing mortgage to be transferred into the sole name to void ERCs - that has to still be chased up.    No further advance is required for the buyout that will come from own funds.  Thank you for the information about the solicitor.  

BikingBud you say - 

"Party 1 would need to pay Party 2  > (£40,300 + (155000-M2)/2)"

I understand this up to the figure of £40,300 but how does one calculate the 155000 - M2/2?


I think this is what MWT is saying in terms of -

"Mortgage was £235k + deposit £80k = Purchase price £315k ... so deposit covered 25.39% of the purchase...

Simply returning the deposit does not recognise the growth in the portion of the property paid for with that deposit...

Paying the mortgage did not equal all of the growth in value of the property, only the portion represented by the mortgage..".

Housebuyer123 you ask what the declaration of trust spilt was - it 50/50 as far as I know.

What to me is unclear is what the remaining sum is that the person being bought out is entitled to  - taking account of the portion of the property paid for  with the deposit and paying the mortgage for 3 1/2 years.

I do hope I have expressed this all clearly here.

MWT

Tarama said:

Housebuyer123 you ask what the declaration of trust spilt was - it 50/50 as far as I know.

What to me is unclear is what the remaining sum is that the person being bought out is entitled to  - taking account of the portion of the property paid for  with the deposit and paying the mortgage for 3 1/2 years.

I do hope I have expressed this all clearly here.

If the declaration of trust specifies 50/50 then the calculation is clear, they are entitled to 50% of the equity in the property.... (current value - remaining mortgage balance).

If you had wanted a more equitable calculation taking into consideration the imbalance in the deposit funding then it should have been written into the declaration of trust...

If this is an amicable split and there is room for negotiation then my approach sets out how to factor in the deposit issue, but they are entitled to a full 50% share if they wish to stick to the declaration of trust...

housebuyer143

Tarama said:

Hello 

thank you all for your responses. This is helping in trying to understand this compex and vexatious situation. 

Hoenir you state - 

"The existing lender may possibly allow the existing mortgage product to be transferred into the sole name. Avoiding ERC's etc. Something to enquire about.

Will a further advance be required to fund the buyout? 

Solicitor will handle the Transfer of Equity as part of the remortgage process into the sole name. Disbursing the monies to the non resident party upon completion of the remortgage"

What the aim is - is that the lender will allow the existing mortgage to be transferred into the sole name to void ERCs - that has to still be chased up.    No further advance is required for the buyout that will come from own funds.  Thank you for the information about the solicitor.  

BikingBud you say - 

"Party 1 would need to pay Party 2  > (£40,300 + (155000-M2)/2)"

I understand this up to the figure of £40,300 but how does one calculate the 155000 - M2/2?


I think this is what MWT is saying in terms of -

"Mortgage was £235k + deposit £80k = Purchase price £315k ... so deposit covered 25.39% of the purchase...

Simply returning the deposit does not recognise the growth in the portion of the property paid for with that deposit...

Paying the mortgage did not equal all of the growth in value of the property, only the portion represented by the mortgage..".

Housebuyer123 you ask what the declaration of trust spilt was - it 50/50 as far as I know.

What to me is unclear is what the remaining sum is that the person being bought out is entitled to  - taking account of the portion of the property paid for  with the deposit and paying the mortgage for 3 1/2 years.

I do hope I have expressed this all clearly here.

If the declaration of trust is 50/50 on the equity, then the person being bought out would get back their deposit plus half of the equity that's the property has increased by - at least this is how I would view it.l, but it depends on the wording and this is assuming the DOT says that they get their respective deposits back. 
So they would get their 16% back of the deposit they paid plus 50% of £55k. But bare in mind that the estate agent value might be too high and it might not be realistic. 

Hoenir

Tarama said:

Housebuyer123 you ask what the declaration of trust spilt was - it 50/50 as far as I know.

What to me is unclear is what the remaining sum is that the person being bought out is entitled to  - taking account of the portion of the property paid for  with the deposit and paying the mortgage for 3 1/2 years.

I do hope I have expressed this all clearly here.

The wording of the DOT is key in this regard.  What does it say? Anything not said would reasonably suggest a 50/50 division of the remainder. 

MWT

housebuyer143 said:

So they would get their 16% back of the deposit they paid plus 50% of £55k. But bare in mind that the estate agent value might be too high and it might not be realistic. 

If it does mention returning the deposits in the declaration, then it would be 50% of the remaining equity after deducting the deposits though surely? ... not 50% of the increase in value as presumably this is a repayment mortgage so the joint mortgage payments will have reduced the outstanding balance.