Co-ownership where I pay downpayment, my brother pays the mortgage, could it work?

[verity-m]

Hello! Anyone have any advice on buying a property with a family member, where one person puts in the downpayment and the other pays the mortgage?

 

The emotional reason for doing this is the we both want a bolthole near our parents.  The financial reason is that he has a well paid job but little savings (due to already owning his home + existing mortgage) whereas I have a chunk of savings but my income is average, so together we could afford something neither one could alone. 

 

I'm looking for advice on the legalities, tax questions, calculating respective equity etc. I'd love to hear from anyone who has seen this work, or any reasons why it wouldn't!

 

The issues as I see it are:

- The lender may want both of our names on the mortgage if we're going to be co-owners (not sure if this is the case but it's a worry)

- I don't want to be on the mortgage because a) I don't live in the UK at the moment so would be extra complicated and b) I wouldn't be able to afford the £1500/m repayments on my own if anything went wrong as I'd still be renting elsewhere (France)

- The fact that I live in France may incur 2% extra stamp duty (any work-arounds if it's all in his name?!)

- Not sure how to calculate the respective equity each of us would have in the property in an eventual sale in a few years time or if one wanted to buy the other out. 

 

Any advice greatly appreciated!

Thanks

Verity

[Stuart Phillips]

You can gift your brother a deposit to buy a house, thats not a problem.

If you want to safeguard your equity though, you would need to be on the title, or would need a seperate deed. Take some advice from a lawyer on this point.

If trust isnt an issue and you are comfortable that your brother would gift back a fair share of the equity, then just let him buy it with your gift. I think a fair way would be to take the initial investment back yourself, your brother takes back the money paid off the mortgage and you split the rest, which would be down to property inflation.

[Lilla D]

Further to Stuart's points, just some additional info:

- It is possible to get a mortgage in the UK while you live abroad - the lender options are limited, but that's the broker's problem to find the best deal for you, the process itself is exactly the same from your point of view;

- If both of you are on the mortgage, you're correct that both of you could be pursued for mortgage payments and obviously things could go wrong for your brother as well, who already has another mortgage and then it'd fall on you to pay this new mortgage;

- I'm not aware of an extra 2% stamp duty because you live in France, but as your brother already has a property, there will be an extra 3% stamp duty to pay on the new property. Your solicitor will be able to advise you on this point in more detail.

[Julia Urquhart]

I think this could very well end badly! There is nothing like arguments over money to split a family and this looks a pretty complicated arrangement!

If you go ahead with it, make sure you have a written agreement to cover most eventualities, including the death of one or other or you as your investment could be claimed by the survivor's beneficiaries. How will you cope with insurance, repairs etc How will you decide when or if to sell? What happens if you disagree on something, especially something unexpected?

If you do go ahead I would suggest that you keep it as simple as possible - if you gift the deposit to your brother and it is 15% of the cost I would suggest you own 15% of the property when it is sold.

Overall, I wouldn't do this.

 

[Sam_F3]

@verity-m

One thing to consider which others have not raised yet, is how you split the proceeds upon (eventual) sale. 

Let's say you put 25% deposit down. On day-1, you own 25%, the bank owns 75% and your brother owns zero. So if you sold a day after purchase, your brother would get nothing. I think everyone can agree on that. 

Now let's fast forward 10 years. Your brother has made principal and interest payments on a mortgage where on day-1 he had a zero share in the property. Let's think about the first mortgage payment of £1,500 (your figures). Essentially he has lent you £1,500 to cover your mortgage (assuming you did not contribute to the mortgage). You can 'repay' him by giving him a share in the property worth £1,500 at the purchase price. So in 10 years time, assuming no change in mortgage rate, he would have paid £180k. If the property cost originally £360k, he'd now have a 50% share. So far, so good. 

Where it gets tricky, is that the total repayment of the mortgage will likely cost more than 100% of the purchase price (depending on leverage) or at least more than the amount of capital borrowed. So at some point, your brother will effectively be buying you out once his payments have exceeded the original mortgage amount. What will you do then?

If you want to get really technical, well once your brother has made the first payment, he now owns a share of the property, so he's paying off a tiny bit of the mortgage on his stake too, which grows over time. You'd then need to recalculate his share each month (build a spreadsheet) and keep track of this. 

Other points to think about are (i) that he's increasing his stake at the purchase price, whereas, if the property is appreciating (as likely the case), the deal gets better and better for your brother as he buys in at a low price; and (ii) tied in with this, is that your deposit could be earning a return somewhere else, so your brother is benefiting from a zero cost deposit. Maybe he should pay some notional interest reflecting that he's 'borrowed' from your deposit? 

Either way, this is going to be complicated. As others have said here, I personally would be unlikely enter into such an arrangement. It's a great way to have a falling out with a family member down the line. So think carefully about how the arrangement will work and employ a solicitor to draft it up accordingly. 

[Lilla D]

16 hours ago, Sam_F3 said:

Let's say you put 25% deposit down. On day-1, you own 25%, the bank owns 75% and your brother owns zero. So if you sold a day after purchase, your brother would get nothing. I think everyone can agree on that.

I'll beg to differ on this point, I'm afraid.

Verity's original question was about her not being on the mortgage and on the title deed, i.e. even if she contributed 25%, she wouldn't have owned 25%.

But let's say she did go onto the mortgage and the title deed and became 25% owner and she and her brother obtained a 75% mortgage. The title deed would NOT show her as 25% owner and the bank as 75% owner. If she was 25% owner, then the brother would be 75% owner. The bank would have their interest noted and they would get paid first from a sale up to the outstanding mortgage amount at the time. The rest of the sale price would be split between Verity and her brother based on their share split, i.e. 25 / 75 in this scenario.

When two people jointly become owners, they have 2 options:

- joint tenants, i.e. 50/50 split

- tenants in common, i.e. the shareholding split is specified

Based on these facts, the brother accruing shareholding from zero or accruing shareholding equal to his mortgage payments, etc. are simply not true.

Even if Verity was 100% shareholder (e.g. because the mortgage is in joint names, but the title deed is in her sole name), the brother doesn't automatically accrue shares in the property just because he's paying the mortgage. When the property is sold, he could argue his case or even go to court over it, but paying the mortgage doesn't give him any automatic rights or extra shareholding. In the eyes of the lender, both parties are liable for paying the mortgage regardless of their shareholding and in lieu of any separate legal agreement, the shareholding stays the same based on whatever was included on the title deed at the time of the purchase.

[Sam_F3]

@Lilla D

I think you have missed the point. I am talking about how to split the economic interest, i.e. what they should put in the Deed of Trust - in answer to the question below. 

On 1/13/2022 at 10:26 PM, verity-m said:

- Not sure how to calculate the respective equity each of us would have in the property in an eventual sale in a few years time or if one wanted to buy the other out. 

If the property costs £100k, party 1 puts in £25k deposit and the bank puts in £75k. Sell the property tomorrow. If you are telling me that a third party (i.e. the brother) should somehow get a share of the property by virtue of having his name on the title (and this is where the DoT comes in), then I have a deal for you. Let's buy a property together - you put down the deposit, I'll put down nothing and let's flip it. Let me know what my profit share is, I'm keen. 

Of course there needs to be a DoT and one way of splitting the equity is giving the brother an increasing share of the equity as he pays the mortgage off. I'm sure there are other ways too, this is just one idea that comes to mind. Interested how you would do it. 

[Lilla D]

Hi Sam,

Sarcasm is one way to deal with things, mentioning facts is another  As evident from your posts and mine, we look at things differently.

Referencing the same portion of Verity's email, I believe I addressed the point in my post above, no need for repetition. A Deed of Trust is indeed a way around the problem, but it doesn't change anything that I stated above.

[Sam_F3]

2 hours ago, Lilla D said:

Hi Sam,

Sarcasm is one way to deal with things, mentioning facts is another  As evident from your posts and mine, we look at things differently.

Referencing the same portion of Verity's email, I believe I addressed the point in my post above, no need for repetition. A Deed of Trust is indeed a way around the problem, but it doesn't change anything that I stated above.

I apologise if you thought I was being sarcastic, that was not the intention. I agree 100% with your facts. What is also a fact is that it was 9 degrees today in London and Boris Johnson is our PM (ok maybe I am being sarcastic now). But do your facts answer the following question - what is the equitable split of the proceeds upon a sale? I'm not talking about legalities of the title, I am talking about what is a fair split when someone puts down the deposit and the other pays the mortgage. A Deed of Trust is required to set out the economic interest of each party and what the mechanics are upon a sale (which will override the title). As my original post concluded, hire a solicitor to draft the appropriate documentation. I think your response highlights the pitfalls of someone going down this path without a deed of trust! 

So back to the original question and my example which you disagree with. If someone puts down the deposit, the other party puts nothing down and the property is sold the following day, what in your view is the fair amount this third party who put no money down should be entitled to? If your answer is more than zero, then please explain why that is equitable. Further, if the brother pays the mortgage for 5 years, how much of the proceeds should he be entitled to from the sale at the end of the 5th year? The title doesn't tell me, but a well drafted and thought out deed of trust should clearly set out how the proceeds should be split. So how do you think the proceeds should be split in this example that is fair to both parties and acknowledges their respective contributions?

[Lilla D]

Boris Johnson is our PM...for now  I didn't aim to put forward a "fair" / "reasonable" / "economic" solution to the problem, I was merely stating facts to correct the ownership information you laid out. 

Consider everyday scenarios like man and wife own a property together, but only the man works, the woman is a housewife and thus the man pays the mortgage. Yet, when they divorce, the woman gets a part/whole of the house / maintenance, etc. at a varying level dependent on individual circumstances, negotiation, judge's discretion, power struggles/blackmailing... you name it. How do you calculate what is "fair"?

In Verity's case, if she contributes the deposit and the brother pays the mortgage, I can see why you were suggesting that the brother should build up an increasing percentage of ownership. However, the brother physically cannot start from zero unless they do what I mentioned above about joint borrowing sole ownership in Verity's name with a deed of trust in place to re-assess how the sale proceeds should be split later on. Alas, without looking into it, I'm not sure that a joint borrower sole proprietor arrangement is possible while Verity is an expat. Maybe yes, maybe not. 

As a broker, I see a lot of purchases / remortgages with two or more people involved and the deposit and income contribution are not equal 99% of the time. Most people don't do a deed of trust, just go with the flow. As mentioned, something could happen to Verity's brother down the line and Verity may end up paying the mortgage. Or they may rent out the property and the mortgage is paid from the rent...

Anyway, one solution that I've seen was that the initial deposit coming from one party was ring-fenced by a deed of trust, i.e. it was specified that the deposit amount would go back to the party who originally gave it. The party paying the mortgage would get their money back and if anything was left over, it'd be split 50-50. Is it the best way to do it? For them it was, others might choose to do it differently.

 

[Sam_F3]

27 minutes ago, Lilla D said:

I was merely stating facts to correct the ownership information you laid out. 

Semantics! I wasn't being literal (of course the bank doesn't 'own' 75%, I was being colloquial) but hey I see where you're coming from. 

The problem with your client who made that arrangement is that on a 25 year repayment mortgage at 2.5% and 75% LTV, the total repayments will exceed the purchase price. In the unlikely event the property did not increase in value (hypothetically speaking) the person paying the mortgage would have 'eaten into' the entire deposit. 

Anyway, no one here as offered a good way for Verity to come to an agreement with her brother, rather all we've done is shown how complicated such arrangements can be! 

[Lilla D]

Indeed - Verity, please let us know what you decide in the end, as now we're interested in your solution

[verity-m]

Thank you all for your comments! I'm reading eagerly and taking it all onboard 🤓 For those of you now invested in this story I will let you know how we proceed!