Tentants in common question

StephCol

we are first time buyers having trouble with the tenants in common. there seems to be little advice on how the shares are calculated or found. we are getting a interest only mortgage. one person is putting in £16500 into the deposit. The other person is putting £4000 into the deposit. We are sharing the monthly interest payments equally.
So what should the tenants in common shares be?
Thanks for any replies.

subjecttocontract

How much are you borrowing and whats the price of the property ?

StephCol

the property is £155,000
10 percent deposit = 15500
mortgage amount = 139500
rest of money used for fees and initial diy work

subjecttocontract

My take on this is as follows, others may disagree:-

Mortgage £139500
Money injected £20500
Total £160000

Therefore:
1st person has half the mortgage = £69750 + £4000 = 46.1%
2nd person has half the mortgage = £69750 + £16500 = 53.9%

Hawkings_Boots

subjecttocontract wrote: »

My take on this is as follows, others may disagree:-

Mortgage £139500
Money injected £20500
Total £160000

Therefore:
1st person has half the mortgage = £69750 + £4000 = 46.1%
2nd person has half the mortgage = £69750 + £16500 = 53.9%

Sounds good to me as if you just went for the amount instead of percentages you'd have a decreasing asset!

Richard_Webster

You could do 46.9/53.1 but you have to look at how you would apply that in practice.

I assume those percentages are of the eventual sale price. However they aren't actually putting in £69,750 each but only payments towards it.

So if prices stay static for a year and then they sell for £155,000, with say £4,000 for agents' commission and legal costs they are left with £151,000 before the mortgage is paid off. Assuming there is no redemption penalty (big assumption) then they might owe something like £137,000 on a repayment mortgage. That leaves £14,000 to divide between them.

So now apply the 46.1/53.9 ratio to what?

Try doing this with the selling price less the fees = £151,000.

So 46.1% is £69,611 from which you take off half the mortgage (£68,500) and that leaves you with £1,111.
53.9% is £81,389 less £68,500 is £12,889
So one gets 7.94% of what is left and the other 92.06%. Yet they contributed 20% (£4,000) and 80% (£16,000) of the capital!

Do the calculation again, but this time only as a percentage of the £14,000 available - this gives £6,454 and £7,546 respectively. So how come one person put in £4,000 and it has grown, and the other £16,000, and is worth less than half now?

What we didn't do was take into account the actual mortgage payments. Say these are £900 per month. Each person has paid £5,400. in a year.

I think the sensible way of doing it is to ignore the amount of the mortgage loan altogether. Look at the total of what each person has put in and divide the resulting money (in this case £14,000) in the same proportions. One has put in £4,000 + £5,400 = £9,400 and the other £16,000 + £5,400 = £21,400. The ratios here are 30.52%/69.48% which seems fairer because the person who put in less capital has been paying an equal share of the mortgage and therefore his/her proportion should increase over time. This gives £4,273 and £9,727 out of the £14,000. There has been a net loss on £20,000 put in so each is losing out on that but the lower one benefits very slightly because of his/her mortgage payments.

You can then do further exercises in working out what would happen with various hypothetical time frames and house price increases and decreases and you can see whether you think each formula looks fair....each time taking into account the actual mortgage payments made by each of you.

You would need a trust deed to set this out, but it will avoid the problem that arises further down the track if people split up and the money comes to be worked out and one of you realises how unfair the formula you agreed turned out to be.

subjecttocontract

Yes good post Richard. Just goes to show how complex the calculations are.

Out of interest what do solicitors normaly do? Or is there no normal ?

Johnhowell

Steph,
I have read a Deed of Trust, drawn up by a solicitor, detailing the shares for a Tenants in Common arrangement. This states that if the property is sold then each party gets back their initial deposit first then 50% each of the residual after costs. Assuming equal contributions to the mortgage and running costs.

John

Richard_Webster

Yes good post Richard. Just goes to show how complex the calculations are.

Out of interest what do solicitors normaly do? Or is there no normal ?

I have read a Deed of Trust, drawn up by a solicitor, detailing the shares for a Tenants in Common arrangement. This states that if the property is sold then each party gets back their initial deposit first then 50% each of the residual after costs. Assuming equal contributions to the mortgage and running costs.

I think the formula above is quite common, because I suspect most solcitors tend to let the parties decide what they want by way of formula - which is all very well until years later they realise it wasn't as simple as they thought and had their solicitor really explained the implications to them? However the formula suggested doesn't deal with what happens if there is a "loss."

In this case given the hypothetical examples put up by me there would not be enough money to pay out the £20,000 put in by both of them - so how is the loss to be shared? It could be on a 20/80 split (£4,000/£16,000) or following the logic that if each is to benefit by gaining half of the excess then they should suffer an equal detriment if there is a shortfall. This can be a little unfair to the person who has put in a smaller amount - in this case there is a £6,000 "loss" (£20,000-£14,000) and if they bear this equally then their respective takes are £1,000 and £13,000! Is that fair?

If I do one of these deeds I have to charge to reflect the time and it isn't just drawing up the deed itself, but making sure that the couple have actually understood what is involved.