Deed of Trust between siblings
Discussion
I've been living in the same rented property for several years, and the landlord has decided to sell it, offering me first refusal. I can't secure enough of a mortgage to buy it by myself, and my sister has offered to help by getting a joint mortgage together. She's still living at home with our parents, has no dependents, or any intention of moving out in the next five years at least. We both have substantial deposits (equal to 25% each of the purchase price), inheritance from grandparents.
I will be paying all of the purchase costs (legal fees, stamp duty etc), and all of the mortgage costs/payments - easily affordable for me alone, as it's about half of the current rent that I've been paying for years, at least for the initial fixed rate period. I'd also be responsible for all the maintenance and repairs on the property. It's a bit run down since the landlord hasn't really touched the place in the last 10 years while I've lived here. Nothing major by itself, just general appearance that is reflected in the price we've agreed. All things that you'd sort out if it was your own place, and I intend to address over time. Things like fences rotten and falling down, all exterior painting and interior decorating overdue, worn carpets, tired kitchen and bathroom suite, and a 20 year old GCH boiler.
Obviously we need to get a deed of trust agreed from the start. I was intending it to be a mortgage and equity type split where we each have different proportions of the two. So we'd both have a 50% share of the initial equity, but as I'd be committing to pay all the mortgage, would have 100% of the mortgage share. I've taken this from one of the example scenarios on a UK website that specialises in these agreements (won't link but easy to guess/google it).
So my sister would hold a fixed 25% of the total share, along with a caveat that guarantees she'd get back at least what she put in (in the event of decrease in value or a very early sale and not enough equity to cover mortgage charges/sale fees. So in the event that there's not enough equity in her half to guarantee her minimum return, I'd make up the shortfall from my equity share. In the event of the house value increasing when it comes to sell, she'd get 25% of the sale price (i.e. her initial deposit back, plus a 25% share of the capital gain). I intend to overpay on the mortgage (we've chosen one that allows this, up to 10% per year), so there is every chance there'll be enough equity to cover her investment anyway. In return, I'd like a clause that says she can't force sale/withdrawal from the mortgage within the first 5 years (as she says she has no intention of). Longer term I don't know, but I'm happy that at any point she could ask to come off the mortgage and claim her share of the equity.
I don't see it as a long term situation, but at least I get 5 years of stability, and hopefully a combination of my renovations/improvements and house price increases will see us get back more than we put in. I think this minimises any risk exposure to my sister - worst that could happen is she gets back her initial deposit, unless something catastrophic (like my death) happens very early on, in the first year or so. Whilst at the same time she is potentially going to see a return on her 25% stake.
But my parents are saying she should be entitled to more - a 50% share of all the equity in the property, although the deed would be periodically altered to and her share reduced periodically by the amount of the mortgage repayments. That would give her a 50% share of any capital gain, effectively from a 25% stake and no commitment towards the necessary repairs and maintenance. I feel that's a bit weighted in her favour - to get half of the potential capital gain from a limited and protected exposure. If she wants to be a property investor and speculate on making a gain on 50% of a capital gain, then her initial deposit shouldn't be entitled to protection, and she should pay half of the stamp duty and legal fees, along with costs towards the impending repairs/maintenance. I'd even be prepared to pay her a proportion of the market rent, to represent her share of the investment.
Ignoring house price inflation, I think that just by bringing the place up to standard with the essential maintenance/decorating that I'm intending to do (mostly DIY with my own time) could add up to 10% to the value. If (big if) house prices rise at 2%/yr, that's another 10% increase over 5 years. If sister wants her capital back in 5 years time, and even if I can clear 40% of the mortgage by then (possible I think), I doubt I could buy her out if it includes a 50% share of the capital gain. My proposal would see her with a 25% profit on any capital gain, whilst making no contribution towards improvements.
So basically, does it sound reasonable that she gets a 50% stake in potential future capital gain from a 25% of the investment, with minimal risk, and a agreement that states she doesn't pay anything towards the mortgage? I think the difference is potentially a deal breaker for me, and I might be better off looking for an alternative.
I will be paying all of the purchase costs (legal fees, stamp duty etc), and all of the mortgage costs/payments - easily affordable for me alone, as it's about half of the current rent that I've been paying for years, at least for the initial fixed rate period. I'd also be responsible for all the maintenance and repairs on the property. It's a bit run down since the landlord hasn't really touched the place in the last 10 years while I've lived here. Nothing major by itself, just general appearance that is reflected in the price we've agreed. All things that you'd sort out if it was your own place, and I intend to address over time. Things like fences rotten and falling down, all exterior painting and interior decorating overdue, worn carpets, tired kitchen and bathroom suite, and a 20 year old GCH boiler.
Obviously we need to get a deed of trust agreed from the start. I was intending it to be a mortgage and equity type split where we each have different proportions of the two. So we'd both have a 50% share of the initial equity, but as I'd be committing to pay all the mortgage, would have 100% of the mortgage share. I've taken this from one of the example scenarios on a UK website that specialises in these agreements (won't link but easy to guess/google it).
So my sister would hold a fixed 25% of the total share, along with a caveat that guarantees she'd get back at least what she put in (in the event of decrease in value or a very early sale and not enough equity to cover mortgage charges/sale fees. So in the event that there's not enough equity in her half to guarantee her minimum return, I'd make up the shortfall from my equity share. In the event of the house value increasing when it comes to sell, she'd get 25% of the sale price (i.e. her initial deposit back, plus a 25% share of the capital gain). I intend to overpay on the mortgage (we've chosen one that allows this, up to 10% per year), so there is every chance there'll be enough equity to cover her investment anyway. In return, I'd like a clause that says she can't force sale/withdrawal from the mortgage within the first 5 years (as she says she has no intention of). Longer term I don't know, but I'm happy that at any point she could ask to come off the mortgage and claim her share of the equity.
I don't see it as a long term situation, but at least I get 5 years of stability, and hopefully a combination of my renovations/improvements and house price increases will see us get back more than we put in. I think this minimises any risk exposure to my sister - worst that could happen is she gets back her initial deposit, unless something catastrophic (like my death) happens very early on, in the first year or so. Whilst at the same time she is potentially going to see a return on her 25% stake.
But my parents are saying she should be entitled to more - a 50% share of all the equity in the property, although the deed would be periodically altered to and her share reduced periodically by the amount of the mortgage repayments. That would give her a 50% share of any capital gain, effectively from a 25% stake and no commitment towards the necessary repairs and maintenance. I feel that's a bit weighted in her favour - to get half of the potential capital gain from a limited and protected exposure. If she wants to be a property investor and speculate on making a gain on 50% of a capital gain, then her initial deposit shouldn't be entitled to protection, and she should pay half of the stamp duty and legal fees, along with costs towards the impending repairs/maintenance. I'd even be prepared to pay her a proportion of the market rent, to represent her share of the investment.
Ignoring house price inflation, I think that just by bringing the place up to standard with the essential maintenance/decorating that I'm intending to do (mostly DIY with my own time) could add up to 10% to the value. If (big if) house prices rise at 2%/yr, that's another 10% increase over 5 years. If sister wants her capital back in 5 years time, and even if I can clear 40% of the mortgage by then (possible I think), I doubt I could buy her out if it includes a 50% share of the capital gain. My proposal would see her with a 25% profit on any capital gain, whilst making no contribution towards improvements.
So basically, does it sound reasonable that she gets a 50% stake in potential future capital gain from a 25% of the investment, with minimal risk, and a agreement that states she doesn't pay anything towards the mortgage? I think the difference is potentially a deal breaker for me, and I might be better off looking for an alternative.
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