A Couple's Personal Finance Mortgage Question

Mrs_Bumble

I think if I am understanding what you are trying to get at correctly then you are intending to purchase the property outright with the money you have, whilst giving Paula the opportunity to contribute and become party to the equity of the property.

I would suggest that you both seek separate legal advice as couple of things occur to me the cynic (not that I have been married and divorced or anything lol!)

From your point of view if you register the title as 80/20 in your favour at the beginning, you are effectively saying that you acknowledge that 20% share of the property is Paula's, and she won't have contributed to this initially as it is going to be a gradual thing. So I believe then that if things went south and you split up it would mean that Paula would have a claim on 20% of the property.

From Paula's point of view whilst I would acknowledge that I am not putting up a lump sum payment at the outset, would I feel comfortable committing myself to making the payments for the 20% if there was nothing in writing acknowledging this? As stated above the cynic in me says NO.

So I think your next port of call is legal advice so that both of your interests are protected, maybe there is another legal way of drawing up a contract protecting both interests, but as I have said above, for total impartiallity would recommend separate counsel.

Jas0nP

I completely agree with you Bumble. It still has it's holes yet. I imagine if only John's name was put on the home and then with legal counsel a contract was drawn up to say something to the effect of Paula's payments count as equity on the house and if the couple were to sperate then all Paula's payments would be added up and she would have the corresponding equity in the home.

Walking this through in my head, if Paula paid £50/month to the lease and £320/month towards payments, at 4% that is a 25 year mortgage on £60k equity on the home.

If they were to split in 10 years, Paula would have paid 10/25 of her payments in other words 40% of them which would get her 40% of her £60k in equity which is £24k in equity or 10% of the home. So with a solid legal contract if when they split at this point John could either give Paula 10% of what the house is worth at that point or they could sell the house and Paula gets 10% of the selling price.

Sure this was a messy thread but that has to be the fairest way so far?

FWIW, i think this is still in Paula's favour. Small lease payments on large home, small mortgage but large home, no worries about having the house reprocessed on none payments, gaining equity at a low interest rate, with a normal mortgage her first years payments would be mostly on the interest which isn't the case here. But those are small small details.

Mrs_Bumble

My feeling it is still all a little too clinical and I am a romantic at heart.

If I was Paula I am not sure I would be happy at being charged interest payments, you are not paying interest and I imagine you would have bought the property as an investment anyway so you are not losing interest payments? Just divvy it up fair and square.

Both get legal counsel to ensure that both interest are protected because my feeling is that Paula is still the vulnerable party, where did the 10% come from? Why is it only over 25 years? It isn't a mortgage with a term?

John is either putting a 5th on the table for Paula to buy into or not? Surely that is the only fair way?

If John envisages settling down with Paula permanently, marriage kids etc, does Paula earn herself more rights for stopping and having children etc? When married surely the agreement would change wouldn't it? Paula isn't just a tenant is she? She is John's partner and doesn't there need to be some trust there?

Surely this clinical arrangement is only for the interim term whilst a decision about long term committment is made.

Jas0nP

Mrs_Bumble wrote: »

If I was Paula I am not sure I would be happy at being charged interest payments, you are not paying interest and I imagine you would have bought the property as an investment anyway so you are not losing interest payments? Just divvy it up fair and square.

That's almost the same as Paula living rent free then. For every £ Paula spends she gets a £ in equity of the house so money isn't really going anywhere. John's just taking a £ in cash and giving Paula a £ in equity

Paula would be getting an extraordinary deal in that situation an interest free mortgage on 60k while living in a 250k place.

Mrs_Bumble wrote: »

Both get legal counsel to ensure that both interest are protected because my feeling is that Paula is still the vulnerable party, where did the 10% come from? Why is it only over 25 years? It isn't a mortgage with a term?

John is either putting a 5th on the table for Paula to buy into or not? Surely that is the only fair way?.

John is putting a 5th on the table. The 10% came if they split up after 10 years. Paula would have paid 40% of her payments entilting her to 40% of her share. 40% of her 1/5 share is 10% of the whole home.

25 years was just the example i choose for this. What is a standard mortgage length? I don't really know. I also don't understand 'It isn't a mortgage with a term?' i'm an idiot when it comes to mortgage terms.

Mrs_Bumble wrote: »

If John envisages settling down with Paula permanently, marriage kids etc, does Paula earn herself more rights for stopping and having children etc? When married surely the agreement would change wouldn't it? Paula isn't just a tenant is she? She is John's partner and doesn't there need to be some trust there?

This is a big question really. Personally once married with children i'd be under the opinion what's mine is hers. Which changes everything! Since married and kids would be along somewhere along the lines here.

Mrs_Bumble wrote: »

I My feeling it is still all a little too clinical and I am a romantic at heart.

How would the romantic in you want this situation to happen if you were Paula?

getmore4less

Jas0nP wrote: »

Paula wants a way in which she can pay what she can afford and build up equity in the home.

A few people on here did that and now they are splitting they have a big debt to pay and can't get out of owing something when they want a financial split.
There also is the risk that when the time comes John cannot afford to buy her out.

Property goes down as well as up so that needs to be thought about carefully, it could go down faster than she can repay the capital onthe debt.


It is almost imposible to work out the build up of equity on a moving target a bit at a time(the value of the place changes over time) much easier to do it with hard cash so borrow a set amount(even if from John) and then the capital/equity payments are fixed based on what is borrowed and the equity in the property is fixed from the start.

NOTE: that any capital projects also need to be split in the same ratio to keep the equity ratio the same.

If I were her I would forget the "equity", the place is going to lose money over the next year or two and the lease will loose years reducing the value eventualy, better off saving up hard cash and living in a nice subsidised place.

Mrs_Bumble

If Paula is paying a 5th of the costs per month then she isn't living rent free is she? Charging interest on top, to my mind is a bit much because you are not being charged it and you are not losing it in interest because you have bought the property as an investment? What Paula brings to the table is not just financial is it?

I am losing the train now, did the £60K come about because that was a 5th?

You are not intending to take a mortgage out are you? So how can you decide on a mortgage term of 25 years? Why spread the interest and payments over 25 years, if you would hope to marry in 5 years because you have conceeded yourself that once married what is yours is hers etc.

For me I would be a bit insulted with the above, I understand that from your point of view you need to protect your investment because you have stumped up a lot of cash and so I think that if you could get legal advice about a kind of pre-nuptial agreement type thing, with her making payments of XYZ contribution towards the costs and entitling her to X% of the equity should you split. Oh and I do really think that charging her interest would most definitely be a bit much for me!

I would be happy to move in with the man I loved, knowing that for good reason he had protected his financial interest because of the amount of the outlay but the reasonable amount that I would be paying per month would entitle me to X% if things did go wrong. Knowing full well that it wouldn't and we would live happily ever after and get married ;-)

getmore4less

Mrs_Bumble wrote: »

If Paula is paying a 5th of the costs per month then she isn't living rent free is she? Charging interest on top, to my mind is a bit much because you are not being charged it and you are not losing it in interest because you have bought the property as an investment? What Paula brings to the table is not just financial is it?

If john buys the place(£250k) and gives Paula 20% he has in effect lent her £50k should that be an interest free loan? I don't think so.

Another way to look at this would be if John only had £150k, they would then need to borrow £100k if they did that loan 50:50 they would both have £50k debt but the equity would be split 80:20(£200k:£50k) so they would both be paying interest, the difference in this case is that John is the lender for Paulas £50k.

They should seperate the purchase from the day to day running costs.

If Paula want to buy part of the asset she need to find the money and take on the risk of the asset going up or down in value and split the service/lease charges at the same % as well as any capital investments into the asset.

If she borrows from John, which looks like the only option, then they need to decide what the cost of that borrowing will be(interest free is an option).
A good mortgage rate readily available a few years back would be base + a small%(under 1%), a fair(ish)subsidised rate would be base+0.5%,

Seperately they need to decide how they are going to split the bills/running costs.

Going down the loan route makes it clear and transparant what is going on and what the equity in the property is and what the outstanding debt is.
Trying to build up equity a bit at a time becomes a nightmare to work out since you have to agree the value every time there is a capital payment.

starlet10

The OP is not borrowing anything to buy the home. He is planning on buying the property outright. So there shouldn't be any interest charged. If John were to charge interest then it would be like he is asking Paula to pay him extra for the privilege of living with him, i.e. make some kind of financial gain for sharing the property with Paula, in return for Paula paying lower payments for a bigger property that she could not normally afford.

Once John have bought a home and is living in it on his own, wouldn't the amount of money he spent on it and future spending on it, be the same whether he was the sole occuppant or not? If he was to invite Paula to live with him, any extra costs incurred for having an extra person sharing the home with him, such as bigger bills, council tax, extra furniture, extra cutlery, cockery, bedding, etc., should be split 50/50 between John and Paula.

As for building equity in the property, I thought the plan was to stay in the property for 5 years? How much equity can Paula build in that property in only 5 years? Especially if 3 of those years are spent as a student? And the 'larger' lease required must mean that Paula would prefer a smaller lease that she could afford to share, but John prefers a larger property with a larger lease. In that case, Paula should pay what she can afford and John pays the rest.

It seems more like a business partners buying a business premises rather than a couple who is setting up home with each other. John appears to want a financial advantage for owning a property and allowing Paula to live in it, like lodger and landlord, IMHO. Good luck with your calculations though. I hope you reach a satisfactory answer for both of you.

Mrs_Bumble

I am with starlet Good luck John!