A Couple's Personal Finance Mortgage Question

Jas0nP

I hope i can get some good advice on this situation as i'd like to work out exactly the fairest way of doing this for both parties involved here.

A couple John and Paula are about to buy an apartment together. The apartment is £250k to buy. It has a lease which is also £166/month too. John has enough money saved to buy the house without a mortgage. Paula is currently studying for her PhD earning £12k/year for the next 2.5 years, after which she will be earning £24k - $30k per year, she has no personal savings. They plan to live in this apartment for the next 5 years of their life.

John likes the idea of buying outright rather than getting a mortgage. He likes the way that feels but probably could be persuaded not to if this option would is a terrible idea even without much investment savvy. He is also a poker player so getting a mortgage would be difficult or at a sub prime rate. [more looking for advice on the rest of the post than this but advice here is welcome too].

In the past Paula and John have always rented and Paula has always given John 1/3 of her earnings towards the rent. Usually £350/month and £400/month when in industry one year. Sometimes this has been an even split as the rent was £700/month and sometimes when viewing John liked a more expensive place and was happy to pay the extra himself.

The couple now wants to work out exactly what is fair if John was to buy this house outright and they were to live in it for the following 5 years. Paula again could afford £350/month for the first 3 years and then about £600/month for the last two, averaging at £450/month over the 5 years.

They would both like Paula's post lease payments to build up, however small, a principle in the apartment which would be cut out of Johns principle as she pays money to John. The rate at which to do this, how to most fairly do this, if to include an interest rate, what interest rate to include and any other issues they aren't sure about.

They both understand that Paula payments in the real world would never be on a mortgage that large, so she understands she will build a very small principle in a larger place. Paula also understands she is getting the benefit of living in a larger apartment than they both would if they paid equal payments for the most Paula could afford.

lastly, in this situation splitting the lease doesn't seem completely fair. The lease is based on the square footage of the apartment and as it's John who wants to live in a large apartment rather than a cheaper smaller one putting 50% of that payment on to Paula doesn't seem fair.

Answers to what you think are fair are very appreciated and answers to how you personally would handle this situation if in it.

Many thanks.

beecher

It all seems a bit complicated. I'd just buy the house outright, and let Paula pay for the lease, and half the household bills. If you're a couple who intend to stay together long term isn't your household income all put together? Maybe I'm old fashioned, but paying money to your partner when the house has already been paid for seems 'off' to me. By all means draw up a document about what happens if you split up and encourage Paula to save £300/month so as she has resources of her own, but it all seems a bit clinical to me.

Just my opinion of course.

Jas0nP

It all is a bit clinical, given the unique situation and wanting to be fair.

Paula paying the lease and half the bills is an option and it's a lot easier too than having to work all this out. I would just like to work it out because once decided what exactly is fair it'll be a lot easier to come up with an easy way of going about that. The her pay lease and half of the payments i believe is close to fair and one we've thought of doing, but it would be better with some money going towards the house so she could build up equity in the home.

The problem with having her pay the lease and nothing towards the house more seems like she is just a girlfriend staying over at my place than putting money towards the apartment.

greggymagic

I'm misunderstanding the complexity - Why doesn't John buy the place, put it in his own name and then they can both split the bills. 50 50?

Jas0nP

greggymagic wrote: »

I'm misunderstanding the complexity - Why doesn't John buy the place, put it in his own name and then they can both split the bills. 50 50?

That wouldn't be fair on the other. Even if it wasn't a serious relationship having someone live there for free is a pretty good deal for one party involved. Can i move in with you and split bills?

I guess i should say that i'm treating this more like a math question just to work out what is fair since it's interesting to me given how complex the issue is, since stuff like interest rates on payments etc should be included and what equity given. So it would probably be better to treat my question as a hypothetical math question than a real life one. I just want to find what would be the absolute fair line for payments given, equity got.

beecher

If you're buying it outright, why are you talking about building up equity in the home and interest rates on payments? Maybe I've missed something but I thought the assumption was that you'd be mortgage free?

Real life isn't a maths question, and it doesn't have to be that complex. Surely things like 'trust' and living as a partnership don't fit into a theoretical maths problem.

What does Paula want to do? Ultimately you have to find a solution which you both think is fair - this may or may not be what anyone on this forum thinks is fair, or what any equation might come up with.

Jas0nP

There is talk of equity and payments because in the ideal would John would buy the house and Paula would each month pay x amount and that would build up to y amount of equity in the home. That way Paula owns part of the home and gets to feel like it's part hers too. That would be the exact ideal situation, the complex part is working out how much to pay and how much equity to give.

Working it this way is nowhere close to real life and what the couple choses to do in the end will probably be different to what is exactly fair. But it's good to work out because what they both think is fair could be very unfair to one.

- Paula living rent free and splitting bills would be unfair to John

- Paula paying the whole lease payment and splitting bills and getting no equity would have Paula paying £100k with no equity over 25 years. That would be unfair to Paula.

It is unfornately a complex question

Mrs_Bumble

It is all very clinical.

Does Paula want to build up equity in the property?

If John is buying the house outright then he has his investment, would not Paula be happy to be charged rent for 1/3 the same as previously paid, at least while she is on her bursary?
If John and Paula later marry then they can arrange to have the title of the property divided (tenants in common) by the amount they see as fair, I don't know perhaps 70/30, but until that time I think it would be a lot less clinical and complicated to just have the rent paid as previously has been the case.

Jas0nP

I'm with you Mrs Bumble, everything makes a little more sense after this phd and in our following home. We only plan to live in this place for the next five years and after that our lives would be settling together a lot more which would make everything a lot simpler.

It felt even if it decided to cross this bridge in five years in our next home we'd just be in the same position again, trying to work out what is fair. It'd be a little easier being married and higher income and buying for the next 20 years but it would still be similar.

Mostly i'm just intrigued about this in a math way. There's a right answer and way to do this and getting there is a struggle. I have a few ideas of what would be fair but nothing is ironed out yet.

sharpy2010

If you ask me, "John" appears to be treating this situation like a poker player... In other words, trying to work out a solution to a question which doesn't really make much sense.

More simply... When playing poker, a lot of the game comes down to luck. Thus, trying to beat the odds at poker consistently simply cannot and does not work. There is too much luck involved for any consistency to happen.

Treating this "rental agreement" or whatever else you might want to call it, in the same way as a poker match, cannot work because there are too many "what if's" and "maybe's". Maybe Paula should pay more because John originally bought the house. Maybe John should pay more towards the groceries. Maybe...

And on it goes.

I would suggest life is too short to think like this.

Mrs_Bumble

I agree with the above post. If John likes Paula and does see a long term future then he needs to remember that not everything is black and white. Keep it simple, don't over complicate or you might find that Paula is a bit resentful of how clinical it is.