First time mortgage. Girlfriend has whole deposit. How do we split the value?

Kiwikind

Hi folks

I'm about to enter the scary grown-up world of mortgages and property ownership. I've tried to read as much as I can but finding it all a bit daunting. Wondered if anyone could please give me a top line idea of how my situtation might work out. I'll try to keep the facts as simple as possible.

- Want to buy a 1 bedroom flat with my long time girlfriend. We are both 32 years old. We have no debts. I earn £37K p/a and she earns £23K p/a.

- Her father has given her £100K to get her on the property ladder. We currently rent in London, so we'd be looking at up to £250K for a 1 bedroom flat (keen to avoid the next stamp duty bracket). This would give her a 40% ownership in the house straight off the bat.

- We each have about £5K savings and would split any up front costs such as fees, surveys, stamp duty etc, 50/50, using these separate savings.

- I cannot contribute any deposit. But my earnings are such that I can pay roughly £600 per month towards a mortgage wheras she would struggle paying more than a £300. (Currently I pay 60% of our rent, to reflect my earnings %). I think that she would struggle to find a mortgage on her own in London based on her earnings, and I would not be able to get into property at all if I had to raise a deposit myself. So there's some mutual benefit there, but I'm not sure how much of a figure can be put on this.

- A quick check of HSBC mortgages suggests I could quite easily pay back the entire £150K mortgage over 25 years at an interest rate of 2.5%, paying roughly £535 per month. I would try and overpay as much as I could to clear the debt quicker. Let's say I can top that up to £600, an overpayment of £65 per month

- So if I were to pay the entire mortgage off myself, I would be entitled (subject to getting it legally binding!) to 60% of the value of the house, as her deposit of £100K was only worth 40% of the total value.

- But what if she starts contributing to the mortgage as well? Clearly this helps me out because it reduces the interest and years on the mortgage, and if we end up getting married and pooling our resources then overall we as a couple clearly win. But if it does go wrong, does it mean that she's entitled to even more of the house? How do you work out this amount? I assume this is fair, and that it's just a fact of life that she's got £100K up her sleeve and I don't, but I don't want to find out that at the end of it, she's got way more out of the deal than me. She may not want to - she may want to spend all her earnings on herself, save in the knowledge that she owns 40% of a house and hasn't got a care in the world. But I suspect she'll want to do what is best financially for her (I don't blame her)


So basically, how would we work out approximately what percentage of the value of our property we're exach entitled to at any given time, based on her paying the whole deposit, and each of us contributing various amounts to repayments? Is there some spreadsheet or calculator I can use to work this out? I don't want to find out that I only end up owning




thanks in advance!

Thrugelmir

Why would your g'f struggle to pay more than £300 per month towards the mortgage?

As would appear that you could afford to split the mortgage repayments 50/50.

Using a declaration of trust your g/f could protect the £100k deposit. Any remaining equity in the property after deducting this could be split 50/50.

CLAPTON

try

P is buying price
N is selling price after all selling costs

S .. is her monthly contribution to mortgage
H is His


she gets her deposit back adjusted for change in price (maybe decrease) i.e 100,000 x N/P

then any other equity left is the prorataed so she gets Equity x S/(S+H) and he gets equity x H/(H+S)

if the equity is negative then thats will be what they need to pay to clear the debt


or of course don't buy atall

Kiwikind

Thank you both for your input!

My girlfriend is at the moment struggling to pay £460 of our £1,150 monthly rent, whereas I'm quite comfortably paying my 60% share which is £690. So that's why I said I think she'd struggle (or not want) to pay more than £300 per month to a mortgage, to avoid being overstretched.

thanks again, I will let you know how things develop.

CLAPTON

obviously, if you are serious then you need to model the possible outcomes

at least

fall in price by 10%, 20% 30%

rise in price 20% 50% 100%

and see what you think of the outcomes

getmore4less

There are plenty of threads on doing equitable share splits and hoe to manage the money.

The one thing that does not work is protecting deposits at cash value.

Deposits buy a share of the variable asset.

Splitting the mortgage payments to make it 50:50 on ownership can work well, but has issues with overpayments that are not on the same % split as the mortgage part.
(also has issues with legal liability for the debt when things go wrong)

An alternative is a side loan so deposits/mortgage are 50:50 and the repayments of the loan covers part of the mortgage share the OH could not afford.

eg:

£250k purchase

£100k deposit

£150k mortgage

OH pays £25k of the mortgage you pay £125k so 1/6 5/6 ratio
(Any overpayments are done at the same ratio.)

on selling you get 50% each and then pay off your share of the outstanding mortgage.

This is the only method(with variations) that works equitably for ALL changes in value.

Any capital injections to the property like improvements are done 50:50

Thrugelmir

Kiwikind wrote: »

My girlfriend is at the moment struggling to pay £460 of our £1,150 monthly rent, whereas I'm quite comfortably paying my 60% share which is £690. So that's why I said I think she'd struggle (or not want) to pay more than £300 per month to a mortgage, to avoid being overstretched.

Is your g/f ready to buy a property?

The cost of ownership doesn't stop at the mortgage. You be responsible for paying service charges on a flat.

thomasdown

Personally I would not buy a 1 Bedroom flat, I would go for a 2 Bed Flat. I know its in London and you shouldn't have a problem selling it or even getting a BTL on the property in the future (my cousin couldn't sell her 1 Bedroom flat inside M25 - she had to get a BTL and rent it out). This will probably cost you more in purchase price but if you and your g/f are serious, what happens if she fell pregnant? You would need an extra bedroom? You would have the aggro of trying to sell and paying selling fee's and then fee's on buying a new place. 2 Bedroom properties sell alot easier than a 1 Bedroom property. Is this an option you have considered?

getmore4less

Also with a 2 bed you can get lodger to help out.

Kiwikind

Thanks for the additional replies everyone.

Yes my girlfriend is ready to buy, it's a mutual decision. There's obviously a lot of things we both have to think through together and separately.

Getmoreforless - thank you for your example. I see the logic there. I'd need to crunch the numbers officially but that does seem fair, and that's a good point about costs of repairs/improvements, as their rise in value would benefit one person more than the other if things were not equal. And the point about overpayments is valid. I am able to put in more per month towards a mortgage than her.

We aren't planning on ever having children, so a one bedroom suits us nicely. Unless 2 bedrooms are likely to offer a significantly better increase in value relative to the outlay than 1 bedroom, I don't think we'd want to stretch to a 2 bed just for the luxury of having a guest stay once in a blue moon. And we are keen to avoid the £250,001 ludicrous stamp duty bracket!

Thanks again, I'll keep you all posted.

getmore4less

Another angle is to look at offset mortgages.

The basic splits work the same but a lot more flexable

Borrow more and the OH can keep some of her deposit offset which will help with her cash flow

You can also build up offset funds seperately as you earn more.

If you ignore the interest savings from the offsets(xross subsidy) it is relatively easy to manage.


BArclays allow joint mortgages with seperate individual account offsetting.


The trick is to seperate the borrowing from the ownership(even though legaly they are connected).