Tenants in Common - unequal deposit - what is fair?

Nixmack89

Hi,

I am going back and forth on what is deemed as appropriate and fair and would welcome some thoughts.

partner A is contributing the 10% deposit to the property.  Partner A and B then split mortgage payment 50/50.

Partner A is suggesting to go down as tenants in common, with a deed of trust to acknowledge the differing contributions. Mirrored Wills with a live in trust will also be produced as Partner B has a child from a previous and one child with Partner A.

Would you say 60/40 is a fair split - both can potentially enjoy the rise in property prices in the event we had to part ways.

TIA

RAS

What's fair is what you agree? Are you married?

Possibly a deed of trust returning 10% of the value to A and splitting the other equity. 

That means that in the early days, A gets their equity back but in time it could become 55:45. If you are married then the divorce court would probably expect 50:50 on the remainder.

SarahB16

Nixmack89 said:

Hi,

I am going back and forth on what is deemed as appropriate and fair and would welcome some thoughts.

partner A is contributing the 10% deposit to the property.  Partner A and B then split mortgage payment 50/50.

Partner A is suggesting to go down as tenants in common, with a deed of trust to acknowledge the differing contributions. Mirrored Wills with a live in trust will also be produced as Partner B has a child from a previous and one child with Partner A.

Would you say 60/40 is a fair split - both can potentially enjoy the rise in property prices in the event we had to part ways.

TIA

No, I wouldn't say that was fair.  I agree with what RAS is suggesting instead. 

FlorayG

I think there's a moral decision here - is the 10% all the partner can afford? Is the partner digging deep into every penny they have to provide this 10%? Do you have the 90% deposit in a safe nest egg or are you also struggling to make up the amount? Can you see that if you have 90% easily available and your partner is scraping their finances to the bone to provide 10% then it might actually be morally fair to make the split 50:50?
If you were setting up a business together then obviously you would be entitled to 90% of the proceeds if the business were sold, but when you are setting up life together there are other things than just finance to consider

Wyndham

FlorayG said:

I think there's a moral decision here - is the 10% all the partner can afford? Is the partner digging deep into every penny they have to provide this 10%? Do you have the 90% deposit in a safe nest egg or are you also struggling to make up the amount? Can you see that if you have 90% easily available and your partner is scraping their finances to the bone to provide 10% then it might actually be morally fair to make the split 50:50?
If you were setting up a business together then obviously you would be entitled to 90% of the proceeds if the business were sold, but when you are setting up life together there are other things than just finance to consider

I read it as being that there is a 10% deposit that the partner is paying, with the OP not contributing to the deposit at all?

RAS seems to have suggested a very common sense approach!

Exodi

RAS said:

What's fair is what you agree? Are you married?

Possibly a deed of trust returning 10% of the value to A and splitting the other equity. 

That means that in the early days, A gets their equity back but in time it could become 55:45. If you are married then the divorce court would probably expect 50:50 on the remainder.

Exactly what I would suggest also.

Trying to fix the percentages at the start doesn't work.

E.g average house price is ~£270k, partner A puts in £27k, partner B puts in £0k, and you both take out a mortgage for the remaining £243k.

If you split one day into the mortgage, the equity is fixed at 60/40, meaning partner A gets back ~£16k, partner B gets back ~£11k... not very fair on partner A.

Let's assume they pay the mortgage over 25 years at an average rate of 3%, they each pay around £173k in mortgage payments each, meaning partner A would have contributed £173k+£27k=£200k in total, whereas partner B would have contributed £173k. This is around 53.6% partner A / 47.4% partner B. Despite thisa after two and a half decades of house price appreciation (hopefully), partner A would walk away with 60% of it... not very fair on partner B.

You can see how the % contribution changes over the mortgage, so it's not logical to set a fixed percentage.

FWIW, this is an extremely common Deed of Trust scenario and you've already suggested doing one.

I presume you are party B, and you say you are going back and forth. What is it you're suggesting?

Exodi

FlorayG said:

I think there's a moral decision here - is the 10% all the partner can afford? Is the partner digging deep into every penny they have to provide this 10%? Do you have the 90% deposit in a safe nest egg or are you also struggling to make up the amount? Can you see that if you have 90% easily available and your partner is scraping their finances to the bone to provide 10% then it might actually be morally fair to make the split 50:50?
If you were setting up a business together then obviously you would be entitled to 90% of the proceeds if the business were sold, but when you are setting up life together there are other things than just finance to consider

I think you're confused (or maybe I'm confused)? - they're not buying the house in cash with Partner A putting down 10% and partner B putting down the remainder as you suggest... Partner A is putting down 10% and then they're getting a mortgage for the rest. To be clear, I interpret it that partner B is putting down nothing.

Nixmack89 said:

partner A is contributing the 10% deposit to the property.  Partner A and B then split mortgage payment 50/50.

RHemmings

I would protect the 10% value, so that partner A gets that back. But, anything over that then gets split 50/50. That to me seems a reasonable, simple, and fair method of doing things.

Going into negative equity is unlikely, but should also be considered. 

Is the value of the property from which the 10% is removed the sale price, or the sale price minus the costs involved in selling? Or? That needs to be agreed. 

saajan_12

RAS said:

What's fair is what you agree? Are you married?

Possibly a deed of trust returning 10% of the value to A and splitting the other equity. 

That means that in the early days, A gets their equity back but in time it could become 55:45. If you are married then the divorce court would probably expect 50:50 on the remainder.

Exodi said:

RAS said:

What's fair is what you agree? Are you married?

Possibly a deed of trust returning 10% of the value to A and splitting the other equity. 

That means that in the early days, A gets their equity back but in time it could become 55:45. If you are married then the divorce court would probably expect 50:50 on the remainder.

Exactly what I would suggest also.

Trying to fix the percentages at the start doesn't work.

Its effectively the same as fixing the percentages as 55/45 on the sale proceeds (not the equity which I agree is strange and unfair). The mortgage balance would be split 50/50 still. So upon sale, 
Partner A gets 55% x sale price - 50% x mortgage balance
Partner B gets 45% x sale price - 50% x mortgage balance

You still have to watch for the equity getting below the 10%, eg in 6 months if the mortgage balance is 240k but the value drops to 260k, then the first 10% reserved for Partner A is 26k, leaving -6k equity to split. So would you have Partner B pay back the 3k share of the loss, or does Partner A just take all of the hit..? 

Bookworm225

bottom line is decide upfront what level of risk the person paying the deposit will accept. There are only 3 possibilities:

1. Deposit buys a (larger) % of the property and therefore, on sale, gets that % back. Risk is lose some of the deposit if negative equity, but if price has risen the deposit gives exactly the same benefit ("% profit") as the non deposit person. That is fair, the money invested by both owners (deposit and zero respectively) gives each person the same return on their investment, as long as the mortgage has been split 50/50. If the deposit payer is content with the risk of losing money on negative equity, then it is fairest that they get more of the ownership and thus more money in absolute terns when selling (as long as mortgage is 50/50)

2. Deposit treated as lump sum of money (not ownership %) to be repaid in full before rest of sales proceeds is split according to ownership. Means the deposit person might get their money back (subject to negative equity) but won't get any profit from it. Unfair as loses out to monetary inflation as the lump sum is less "value" at a future date. 

3. Deposit treated as lump sum of money (not ownership %) to be repaid plus interest. Interest to be funded from the sales proceeds. Some protection against inflation, but complex to manage and very unfair as interest rates change over time  

FlorayG

Wyndham said:

FlorayG said:

I think there's a moral decision here - is the 10% all the partner can afford? Is the partner digging deep into every penny they have to provide this 10%? Do you have the 90% deposit in a safe nest egg or are you also struggling to make up the amount? Can you see that if you have 90% easily available and your partner is scraping their finances to the bone to provide 10% then it might actually be morally fair to make the split 50:50?
If you were setting up a business together then obviously you would be entitled to 90% of the proceeds if the business were sold, but when you are setting up life together there are other things than just finance to consider

I read it as being that there is a 10% deposit that the partner is paying, with the OP not contributing to the deposit at all?

RAS seems to have suggested a very common sense approach!

Sorry I read it as 10% OF the deposit
My reasoning still applies, just the other way around