Purchasing house with friend - unequal deposits split?

sync94

Purchasing a house with a friend in London for c. £400k. I'm putting in £50k and he is putting in £10k for the stamp duty and fees (we are both first time buyers).

We want to purchase and live in the house for the next 5 years, after which I will buy him out as my salary projection is higher and he will then use the equity for another place.

What's the fairest way of splitting this? We would both prefer to keep the mortgage payments split 50/50 but obviously the fact I am putting more upfront makes this a little difficult. One possible solution is we split everything 50/50 and on sale I get back the deposit. E.g. let's say in 5 years time we have paid off £30k equity and the house value increases to £420k the same:

If we were to sell then we need to payback mortgage of £350k-£30k = £320k. The equity in the house is then £420k-£320k = £100k. Less my £50k, leaves £50k to split equally so I would need to pay him off for £25k, or remortgage of £420k-£75k = £355k.

Is this the most fair way to do it for us? Is there any alternatives? The main worry with buying with a friend seems to be when do people exit but we have this quite well defined and will get it into the deed of trust so I am feeling OK with it.

Thrugelmir

On the basis that the mortgage is repaid 50/50. In the DOT you both receive the intial deposits made i.e. £50k and £10k. After which you split the remaining equity 50/50.

The DOT also needs to specify what will happen under various, unforeseen circumstances as well. As your relationship is different to most partners that jointly purchase.

sync94

Thanks - that seems like the best outcome. What about if the value of property goes down in the case when we must sell? E.g. if we sold immediately after buying and all we had is £50k equity; would my friend just be left in ruins here or we split 83/17?

getmore4less

Get your deposit back is the same as lending £20k interest free to the other person.
(50-10)/2

It does have the issue that is is not equitable for rise or falls as you noticed

The other alternative is equitable share or you could split the mortgage to balance ownership 50:50


You also need to consider maintaining and improving cost split if keeping for 5 years.

[Deleted User]

Will the (expected/projected/hoped for) equity increase in 5 years make up for your friend using up his FTB SDLT relief buying this property?

yksi

I would second the idea of not counting interest or appreciation. Call it an interest-free 20k loan and write paperwork to this effect (so you are each contributing 30k to the deposit, but you've loaned him 20k of that). When it's time to sell, you ignore the first 60k and return 10k, and any further equity is split in half. That lets you go 50:50 on all repayments and maintenance.

SmashedAvacado

Before you start looking at this mathematically you need to think about which parts of your money is going to be seen as a loan to the joint enterprise of buying the property and which part is to be seen as equity.

You have indicated that you are putting in 50k and he is putting in 10k. This could mean that your equity should be 5/6ths and his should be 1/6. Or it could be 50/50 with you being owed 50k from the venture and him 10k. The difference comes from increase / decreases in value - who get the benefit and in what proportion. Similarly who pays for upkeep and who pays for improvements. Are improvements seen as equity / debt.
Is maintenance seen as the same as mortgage interest - ie not equity.

You need to ensure you have categorised the different payments / costs into equity / non equity as this will help you work out how the split will work much more simply.

On the buy out, who pays fees? do you discount the value by an amount equal to what agents fees might otherwise be?