Legal Agreement for joint mortgage between partners ?

H

hil

Guest
Hi,


Looking for some help with the following scenario please:


A couple who want to buy a house and move in together. A civil partnership may be on the cards in the future.


Each currently have their own property:
Partner A owns property A which is valued at €250k and has no outstanding mortgage.

Partner B owns property B which is valued at €190k and has an outstanding mortgage of €220k.


The initial plan is to:
- take out joint mortgage to purchase new joint property
- Sell property B (either get negative equity mortgage for new property (total LTV will stay below 110%) or use savings to clear the negative equity)
- Potentially do a small equity release on Property A to cover deposit for new joint property if savings are used to clear negative equity
- Keep property A and rent out


There are savings in the background so assume all the figures stack up regarding new mortgage and affordability on repayments.

The key question is the future security of Partner B as they are selling their only asset. Essentially, when property B is sold, partner B only has the joint property as an asset. Should things go wrong in the future, partner A will still have Property A to fall back on – either to live in, sell, etc.

Partner B however has nothing. They could face a situation where they are older, do not have enough savings for deposit on new property/enough money to buy out partner A, may not be eligible for a mortgage for whatever reason, etc. Partner B ends up in a situation where they have nothing to fall back on and faces a future of renting with no assets behind them.


We would like to put a legal agreement in place to make sure both parties are catered for. However we are struggling to come up with something that is fair and realistic.


We have discussed putting property A in joint names, new joint property in Partner B’s sole name, keeping property B and renting out...


Any advice/suggestions/guidance would be greatly appreciated.


Thanks Hil
 
hil said:
Partner B owns property B which is valued at €190k and has an outstanding mortgage of €220k.


The key question is the future security of Partner B as they are selling their only asset. l
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Welcome to AAM Hil. Partner B doesn't have an asset? He has a liability. Partner A would seriously want to think about what they are getting into.

We cannot as you suggest assume all figures are correct until you give us all the figures. Savings, mortgage amounts, interest rates purchase price etc. Also who has what savings etc.

In the beginning of a new relationship it is easy to lose sight of the fundamentals. Don't. Nothing more destined to bring reality than the financials going wrong. This website is full of them. Have a look.
 
Hi hil

First of all, well done on thinking through the issues. In most cases, people just blindly go ahead and buy a house with their partner or friend and don't even ask "What happens if we fall out or break up?" There are many, many questions on askaboutmoney from joint owners who have split up without an agreement and very few such as yours asking about it in advance.

10 years ago, I wrote a draft agreement "Buying a house with a friend" You should check this out to see if it's of any general help, although it is 10 years old.

It's particularly important to have an agreement where the two partners have very different financial positions. When people buy a house together they are jointly and severally liable for the mortgage. What this means is that if B doesn't pay his share, A will have to pay his own and B's share. This extends to any shortfall on the mortgage either. B can clear off out of the country to escape their debts; A can't.

Let's assume that B can afford to service a mortgage of €200k but can't afford to service a mortgage of €400k.

If they buy a house together for €400k and split up, then B will not be able to buy A out. There isn't any form of agreement which will allow this to happen. The house will have to be sold.

So I would suggest that you rent a house together and let out both your houses. That way you keep your houses and can revert to your present position if you later split up.

Alternatively, you could consider moving into either A's house or B's house and renting out the other. Maybe you have done this already and you are now confident enought to buy together.

If you are determined to buy instead of renting, then you will just have to face the fact that you will have to sell the house if you split up.

The simplest thing by far is to contribute equal deposits and have equal ownership of the home, so I would suggest the following to protect both sides.

B keeps their house and uses their savings as a deposit on the house.

House price: €400k
Deposit €80k ( €40k from each)
Mortgage €320k

You split the repayments equally. You split any gains or losses equally. You feel like joint owners.

It is important to have a good deposit to protect against negative equity and to make the sale easier if you split up.

You must put a clause in the agreement:
"Either party may serve notice on the other party that the house be sold within 6 months through xyz estate agents. In the event of a dispute A N Other will act as arbitrator whose decision is final."
 
B keeps their house and uses their savings as a deposit on the house.
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On reflection, I don't think that B should keep their home. B already has an exposure to €190k of property and taking on a further €200k would probably be excessive.

I think that B should sell their home. If B does not have enough cash left to match A's deposit, then maybe A would lend the money to B so that they would have equal shares in the deposit and the house.

Alternatively, they could buy the house equally along the following lines

||A|B|
House price |€400k|€200k|€200k
Deposit|€80k|€80k|0
Mortgage|€320k|€120k|€200k
The downside from this is that B can walk away if there is negative equity. However, if A gives B a loan, it has the same impact - B can walk away.

I would go for a structure like the above, but B should aim to make capital payments on the mortgage or to make payments to A to equalise their mortgage.

Brendan
 
hil said:
Partner B however has nothing. They could face a situation where they are older, do not have enough savings for deposit on new property/enough money to buy out partner A, may not be eligible for a mortgage for whatever reason, etc. Partner B ends up in a situation where they have nothing to fall back on and faces a future of renting with no assets behind them.
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If A hadn't come along what was B's plan? Do they live in the negative equity property?

Why doesn't A buy the new property outright, either with their savings and then pay the mortgage out of their salary or by selling property A, getting a low mortgage etc. Letting B to get on with renting out property B and getting to eventually own the property. B seems to be worried about having nothing while all I can see is problems for A who has assets already and B does not.
 
Why doesn't A buy the new property outright
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Not my area of expertise, but I suspect that it is a relationship issue.

B doesn't want to live in A's house. A doesn't want to be B's landlord.

A & B want to own a house together.

If so and if they are happy to live in A's house, the new low rate of stamp duty means that B could buy half of A's house.

Brendan
 
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