Buying a house at a discount from family

DeanR90

Hi MSE users,

I need some guidance on a unique situation regarding buying our first home please.

Me and my partner are buying our first home from my father who has just inherited it. He is going to give me a discount on the property but wants the discount to stay with myself should we ever sell or worst case scenario the relationship ended. Note that this is not a cash gift that I can then include in my deposit, but a discount on the overall price. How do I ensure upon any potential future sale of the property the value we have put in each will be returned pro rata? We will be paying any remaining mortgage 50/50. We are not married yet.

Note that I have discussed all of this with my partner so we are both on board with it.

If figures help then these are the approximate figures below:

House value £170k
Discount: £40k. approx.
My deposit in Help to Buy ISA: £12000 approx. (before 25%).
Partner's deposit in LISA: £8000 approx (including 25%).

Thank you.

AdrianC

So your father is selling you a £170k property for £130k.
You are putting in £12k (9.2% of purchase price, 7% of market value)
Partner is putting in £8k (6.1% of purchase price, 4.7% of market value)
You will be getting a £110k mortgage, to be paid equally (~85% of purchase price, ~65% of market value)

Your father wants the £40k (23.5% market value) to be kept away from your evil, grasping witch of a future ex...

Seems straightforward. Keep it simple - a deed of trust between you that says the first £(52-8)=44k from any sale goes to you, then the rest is 50/50.

I mean, you aren't planning on splitting up, are you, so this is all academic and just to keep your father happy...

princeofpounds

Does this objective change if you are getting married? The reason I ask is that it will be much harder to protect such value once you are married - divorce settlements nowadays can and do take into account value held in trust for one of the parties.

If you are only concerned about the period before marriage, that's not such a big deal. You should be set up as tenants-in-common, with a deed that establishes your beneficial share of the equity. You want to decide between the three of you what the property is worth, and the discount is therefore an award of a certain % of equity. You do the same with the cash, and then the remainder you split between the two of your on a 50/50 basis commensurate with your mortgage payments. Your solicitor should be used to seeing these kind of things. 

So, for example.

House value is 170k.
Discount is 40k, so 24% to Dean. (rounding here)
Your cash payment is 12k, so another 7% to Dean.
Her cash payment is 8k, so 5% to partner. 
64% is funded by mortgage of 110k.

So Dean has 63%, Partner has 37%, and you both have 50% liability for the mortgage. That means equity shares of 52k for Dean and 8k for partner. When you come to sell, it works like this:

House value is 200k
Mortgage is now paid down to 100k
Dean owns 63% of the property - 126k of sale proceeds.
Partner owns 37% of the property - 74k of sale proceeds.
Dean is due 126k - 50k for the mortgage redemption = 76k of equity
Partner is due 74k - 50k = 24k of equity

You can see that Dean has taken much more of the increased equity value in the property, but Partner's equity has increased much more in % terms. That's the dynamics you both need to understand (on the way up and the way down, if it happens) - your partner is financing a much greater share of her exposure with a fixed liability in the mortgage, but her overall exposure is smaller.

If the house doesn't change value, it works like this:

House value still 170k. Dean owns 107k of sale proceeds, Partner owns 63k.
Mortgage is now paid down to 100k.
Dean gets 57k of equity, Partner gets 13k. 

Unsurprisingly, both of you get an uplift equivalent to half of what has been paid down in the mortgage. So the absolute rise is the same, but it's still larger in % terms for the partner given their small original equity stake.

DeanR90

AdrianC said:

Your father wants the £40k (23.5% market value) to be kept away from your evil, grasping witch of a future ex...

Seems straightforward. Keep it simple - a deed of trust between you that says the first £(52-8)=44k from any sale goes to you, then the rest is 50/50.

I mean, you aren't planning on splitting up, are you, so this is all academic and just to keep your father happy...

thanks for the information. Essentially yes it's to keep the father happy - my parents split up years ago and split the house so I think he's just overly cautious.

DeanR90

So, for example.

House value is 170k.
Discount is 40k, so 24% to Dean. (rounding here)
Your cash payment is 12k, so another 7% to Dean.
Her cash payment is 8k, so 5% to partner. 
64% is funded by mortgage of 110k.

So Dean has 63%, Partner has 37%, and you both have 50% liability for the mortgage. That means equity shares of 52k for Dean and 8k for partner. When you come to sell, it works like this:

House value is 200k
Mortgage is now paid down to 100k
Dean owns 63% of the property - 126k of sale proceeds.
Partner owns 37% of the property - 74k of sale proceeds.
Dean is due 126k - 50k for the mortgage redemption = 76k of equity
Partner is due 74k - 50k = 24k of equity

You can see that Dean has taken much more of the increased equity value in the property, but Partner's equity has increased much more in % terms. That's the dynamics you both need to understand (on the way up and the way down, if it happens) - your partner is financing a much greater share of her exposure with a fixed liability in the mortgage, but her overall exposure is smaller.

If the house doesn't change value, it works like this:

House value still 170k. Dean owns 107k of sale proceeds, Partner owns 63k.
Mortgage is now paid down to 100k.
Dean gets 57k of equity, Partner gets 13k. 

Unsurprisingly, both of you get an uplift equivalent to half of what has been paid down in the mortgage. So the absolute rise is the same, but it's still larger in % terms for the partner given their small original equity stake.

That's great thanks, need to read it through again a few more times but I think I understand.

The examples are a big help thanks!

davidmcn

DeanR90 said:

AdrianC said:

Your father wants the £40k (23.5% market value) to be kept away from your evil, grasping witch of a future ex...

Seems straightforward. Keep it simple - a deed of trust between you that says the first £(52-8)=44k from any sale goes to you, then the rest is 50/50.

I mean, you aren't planning on splitting up, are you, so this is all academic and just to keep your father happy...

thanks for the information. Essentially yes it's to keep the father happy - my parents split up years ago and split the house so I think he's just overly cautious.

Bear in mind that legally this is just going to be between you and your partner - your dad doesn't have any right to stick his nose in and check what's going on.

DeanR90

Would it be beneficial for my partner to pay off a larger share of the mortgage i.e. 60%? So that she can 'close the gap' so to speak between our equities, so that any future house purchase would be more equal? Edit: Or would she be better saving additional money on the side in an ISA?

DeanR90

davidmcn said:

DeanR90 said:

AdrianC said:

Your father wants the £40k (23.5% market value) to be kept away from your evil, grasping witch of a future ex...

Seems straightforward. Keep it simple - a deed of trust between you that says the first £(52-8)=44k from any sale goes to you, then the rest is 50/50.

I mean, you aren't planning on splitting up, are you, so this is all academic and just to keep your father happy...

thanks for the information. Essentially yes it's to keep the father happy - my parents split up years ago and split the house so I think he's just overly cautious.

Bear in mind that legally this is just going to be between you and your partner - your dad doesn't have any right to stick his nose in and check what's going on.

I'm aware, thanks. It's a hypothetical situation anyway.

getmore4less

if you go down the you get the money back that is equivalent to an interest free loan to the other person of half that amount.
Do you want to lend the OH £22k interest free?
You could run that as a side debt they pay you back
Your starting LTV is just under 64% you could keep some cash back for a higher LTV  to make the difference smaller.

If you want to go equitable shares then the starting point is 
House value £170k
Discount: £40k. approx.(yours)
My deposit in Help to Buy ISA: £12000 approx. (before 25%). (yours)
Partner's deposit in LISA: £8000 approx (including 25%). (theirs)
mortgage £110k  50:50 thats  55k each.
you own (£40+£12+£55)= £107/£170 = 63%
they own (£8+£55)/170 = £63/£170 = 37%
If you sell you get that share from the proceeds and then pay whats left of the mortgage 50:50
any maintenance/improvement you share 63:37,  any overpayments 50:50(or you adjust the debt)

another option if the cashflow allows you own 50:50 and split the mortgage to account for the difference.
the £110 mortgage becomes   £33k:£77k  or 30%:70%

you then own the house 50:50 maintenance improvement 50:50,  overpayments 30:70(or adjust) and that's what how you split the debt when sold

when doing these calculations you need the starting Numbers to include costs  and SDLT etc. not just the purchase price.
on sale all the costs of sale come off before the split and debt repayment.
Everyone starts with a hole in the finances due to the costs.

theartfullodger

Surely the decent honourable British thing to do is buy and sell at real market prices and avoid any suspicion of tax fiddling.

princeofpounds

DeanR90 said:

Would it be beneficial for my partner to pay off a larger share of the mortgage i.e. 60%? So that she can 'close the gap' so to speak between our equities, so that any future house purchase would be more equal? Edit: Or would she be better saving additional money on the side in an ISA?

That is impossible to answer, because the question behind the question is 'will house prices or other investments perform better in the future?'. She can save the capital however she likes, but obviously if she chooses to put it into house equity you have to adjust the calculations and it can be more complex. 

There are two 'simpler' ways of incorporating her increased contributions. One is to decide from the start that she 'owns' more of the mortgage, and more of the part of the property that is originally financed by the mortgage. She will pay more repayments and more interest, but will receive more of the equity over time as the mortgage shrinks and the house (maybe) appreciates. That works, but is a long commitment and she may tire of paying more than you at some stage.

Or, she can save elsewhere, and then at some point in the future make a large bullet repayment on the mortgage, and you adjust the figures at this point.

The most annoying scenario is regular but uneven overpayments. Because to do it in a very technically accurate way, you would need to value the property on each repayment to determine what % of ownership was bought each time. Do you fancy having regular house price negotiations with your partner? I wouldn't. 

By the way, I should remark on the difference between my suggestion and that provided by AdrianC. His method is something that is chosen by a lot of people because it has the virtue of simplicity, which is not to be underrated when it comes to avoiding misunderstandings between partners. However, it won't be quite as technically fair to the provider with the largest amount of initial capital if the house is held for a long time or inflates in value significantly. If you were planning to get married in the next 3-4 years it would probably work fine however.