Buying a property with someone else is a big decision, especially when different amounts are offered. How do you determine ownership percentage?
Sharing the financial load with others when buying a home is a relatively simple way to get onto the property ladder. With up to four people going in together, a larger deposit can be collected and better mortgage rates negotiated. As the lender takes into account each individual’s salary, a larger mortgage overall can be obtained.
Despite the obvious benefits, there are however some drawbacks. One of these is how to calculate the ownership of each individual if they contribute different amounts to the deposit and mortgage – especially important when it comes to selling the property. Here we discuss one way of calculating the ownership between tenants in common (as opposed to joint tenants), highlight some precautions to take and clarify some common questions around joint mortgages.
In theory, working out the ownership of each person (or tenant in common) is fairly straightforward. To determine it all you need to do is calculate everyone’s percentage share. This is done by working out the total contributions (across deposit, mortgage, and repairs or maintenance), before calculating the proportion of each individual’s contribution. If a member has given 35% of all contributions to date, then that’s their ownership percentage.
A Floating Deed
This ratio method is just one example of how to calculate the ownership of each tenant in common in an agreement (there are many more). Ideally an equation on how to calculate the ownership percentage of each member is formalised in a document known as a ‘floating deed’, or ‘Commensurate Share Deed’.
This binding legal document is suited to those who will make unequal contributions to the mortgage and property costs over time. If mortgage payments are to be split equally, then a Deed of Trust would be more appropriate. Either way, if you’re planning to embark on a joint mortgage with someone, it’s best to clarify ownership and potential situations in a contract beforehand.
What if one member wants to sell their share?
Generally, if one tenant in common wants to sell their share, the entire property needs to be sold. This is due to another legal document known as a ‘Trust of Sale’, which should be made prior to entering into a joint mortgage. The proceeds of the sale due to each member would then be split according to the ownership equation as stated in either the Commensurate Share Deed or the Deed of Trust.
Can one member take the shares of another?
Yes – one member can transfer or sell their share of a property to another. This would often entail a valuation of the property before determining the share percentages of the relevant members. A ‘Notice of Correction’ would be needed to take the departing member’s name from the mortgage, and a ‘Transfer of Equity’ arranged to account for the exchange of ownership in the property.
Buying a property with someone else is a big decision. While joint mortgages offer many benefits, certain aspects of the agreement need to be formalised with the aid of a solicitor before committing, to avoid potential disagreements in the future.
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