Calculating how to buy partner out when different contributions were made

zedox1

Morning everyone
I realise that different iterations of this question get asked but I'm needing some help with my own scenario please!
Me and my partner have split and I am in a position that I can buy her out and continue with the joint mortage on my own. I'm trying to calculate a fair price to pay my partner towards her share of our home. She is comfortable leaving me to calculate this (I'm a fair person and want to ensure she is paid fairly for her investment plus a share of equity)

I've seen some simple ways to do this. Equal split, proportionaite split, but theres lots of way to actually calculate this. I'm not sure if mortgage contributions should be included.

We bought a house for £330000 in December 2017.
I paid the 10% deposit of £33000
We both contributed diferent amounts towards purchase costs; Me £3000, her £500.
Over the last 4 years we have invested into the house with a lot of home improvements. Me £30,000, her £11,500.
We also took out some additional borrowing of £12,000 2 years ago to go towards the Home improvements.
The mortgage and additional borrowing payments were split 50/50 and we have paid £47,000 although roughly £24,000 of interest has been added too.
The house has been valued by 3x local estate agents and is now worth £425,000 (an average of their estimates) and there is £288,000 outstanding on the mortage and additional borrowing combined.

How do I calculate what my share is and what hers is?
Should I include Mortgage Payments as part of contribution/split of ownership?
I think I prefer equal split because although I contributed more financially and with the labour she supported me throughout by running the house and contributing whatever she could.

Equal split
Current value Less Mortage balance = £137000 equity
Less 10% the current value (my deposit/10% share of ownership) = £94,500
Less our purchase costs (£3500) and investments (£41500) = £49,500
Less mortgage contributions (taking interest accrued into account) = £26,500
Divide by EQUALLY = £13,250

Then add her share of investments = £13250 + £500 + £11500 + (£47000-£24000) /2 = £36750


Thanks in advance!

Chris_English

If you feel up to doing the calculation, I’d suggest that it would be fair if you both come out with the same Internal Rate of Return (IRR) on the money which you have put in.

I’m not going to go through the full calculation here, but can give you an example.

You bought a house for £100k four years ago, and it’s now worth £108,240, which is an annual rate of return of 2%

If you put £10k in four years ago and your partner put £10k in two years ago then you’d expect to now take out 1.02^2 times as much as her.

Sandtree

Were you married or not?

Its really for you two guys to discuss and agree as there are far too many variables to consider  much of which is highly speculative... so for example you say she has paid £11.5k of home improvements and yet you are saying she needs to pay you £21k towards the total home improvements and yet subject to the type of improvements they were they could continue to appreciate with the value of the property which only you will benefit from... so if it was a new extension will continue to add more value as prices inflate, if it was new carpets then clearly they have a finite life span so will in the short term but not long term.

Personally... £137,000 equity, minus £33k deposit, divided by two

Unless your agreement says you had 55% and she had 45% due to the deposit then saying you get 10% of its current value is fundamentally wrong. If you want to nickel and dime her then look at the return you would have got had the deposit been left where it was instead but with current interest rates and covid impact on shares etc your £33k wouldnt have grown to anything like £42.5k in 4 years

How long were you together in total? 

getmore4less

There are 2 simple ways to start the process but these get a bit more complicated when there is a time line. 

One pretty common is get your money back then share 50:50 when the mortgage is 50:50

This is like an interest free loan of 1/2 the difference
(some are happy with that but you are in for ~£50k more so around 25k loan interest free

The other is equity based on shares based on input.

For extra you can guess or just use start end points to get a range.
 

Lets have a look at your numbers and a time line.
P1(you) and P2(OH)  M(mortgage 50:50)
12/2017 £330k   P1=£33k  P2=£0k   Mortgage £297k ?
12/2017 £3500   P1=£3k  P2=£500

inputs over 4years(timing breakdown would help)
P1=£30k P2=£11.5k   M=£12k

12/2022  Value £425k   M=£288k

If we do this was all done day and you share the mortgage 50:50
 
Total = £387k P1=£220500  P2= £166500  (inc 50% of the mortgage each)

get your money back and split 50:50

increase is (£425k-£387k)  £38k £19k each

P2= (£166,500-£144,000) + £19,000 = £41,500

equity based all paid at start
P1=£220,500/£387k = 57.0%
P2=£166,500/£387k = 43.0%

amount less mortgage due at end

P2= £425 * 0.43 - £144k = £38,750

equity based on all the extra paid at the end(you just get it back).
start 
P1= £184,500/£333,500 = 55.3%
P2= £149,000/£333,500 = 44.7%

extras (add 1/2 the £12k each but take it off the end mortgage debt.
P1=£36k
P2=£17.5k
P2= ((£425k-(£36k+£17.5k) ) * 0.447) - £138k =  £28k   (+ £17.5k) = £45,500

You can do it with the equity split first and an adjustment to cover the inputs being at the end(£42,725) 

That gives you the range   £38,740-£45,500
The get your money back sits in the middle

To do the equity one properly you need to do valuations around the cash injections to rework the ownership but it won't make a massive difference just be a number in the range unless there was a massive difference in timing.


Ignore speculative future value this is virtual sale(by the 2 of you) and a buy(by you) at current value.

You also ignore mortgage payments unless there have been unequal overpayments. 

Many don't get that you buy the house with cash (some borrowed) they become independent after that the mortgage payment is a cost of borroing nothing to do with the equity in the place..

zedox1

getmore4less said:

get your money back and split 50:50

increase is (£425k-£387k)  £38k £19k each

P2= (£166,500-£144,000) + £19,000 = £41,500

Thanks getmore4less. Can I ask, how did you calculate the £387k?
Seperating our original investment and splitting 50/50 seem fairest to both of us in my opinion.

The home improvements were carried out over the last 4 years. All "removables", such as furniture, appliances were excluded.
I do have dates of when each project was finished but I'd rather not go down the IRR route.

getmore4less

zedox1 said:

getmore4less said:

get your money back and split 50:50

increase is (£425k-£387k)  £38k £19k each

P2= (£166,500-£144,000) + £19,000 = £41,500

Thanks getmore4less. Can I ask, how did you calculate the £387k?
Seperating our original investment and splitting 50/50 seem fairest to both of us in my opinion.

The home improvements were carried out over the last 4 years. All "removables", such as furniture, appliances were excluded.
I do have dates of when each project was finished but I'd rather not go down the IRR route.

Hope I got it right it was a quicky

£330k purchase deposit+mortgage(50:50)
£3,500 buying costs(?SDLT)
£30k you
£11.5k oh
£12k Extra borrowing 50:50

That's the total cash input between both of you to purchase the place


Taking this into account

I think I prefer equal split because although I contributed more financially and with the labour she supported me throughout by running the house and contributing whatever she could.

Sound like you were on page to put in what you could with other social factors being generally equal supportive.

If there was an agreement at the start that should be used.

SuseOrm

When you say you can carry on the joint Mortgage isn’t she gonna want her name off that mortgage jolly quick ? 

zedox1

getmore4less said:

zedox1 said:

getmore4less said:

get your money back and split 50:50

increase is (£425k-£387k)  £38k £19k each

P2= (£166,500-£144,000) + £19,000 = £41,500

Thanks getmore4less. Can I ask, how did you calculate the £387k?
Seperating our original investment and splitting 50/50 seem fairest to both of us in my opinion.

The home improvements were carried out over the last 4 years. All "removables", such as furniture, appliances were excluded.
I do have dates of when each project was finished but I'd rather not go down the IRR route.

Hope I got it right it was a quicky

£330k purchase deposit+mortgage(50:50)
£3,500 buying costs(?SDLT)
£30k you
£11.5k oh
£12k Extra borrowing 50:50

That's the total cash input between both of you to purchase the place


Taking this into account

I think I prefer equal split because although I contributed more financially and with the labour she supported me throughout by running the house and contributing whatever she could.

Sound like you were on page to put in what you could with other social factors being generally equal supportive.

If there was an agreement at the start that should be used.

Thank you again, I appreciate your help. Without sounding like I’m challenging your method, I just want to learn and understand it. Some websites/blogs including conveyancing solicitor suggest you take the value less the mortgage balance to calculate the equity. Whats flawed in that method?

Theres no agreement in writing, like most couples who are setting up home together it wasn’t even considered! However we’re on good terms and both agree each should receive investment back plus half any increase in value. I’ve just been struggling to work it out!

thanks again

zedox1

SuseOrm said:

When you say you can carry on the joint Mortgage isn’t she gonna want her name off that mortgage jolly quick ? 

The mortgage will be transferred to me as part of the buy out

getmore4less

zedox1 said:

getmore4less said:

zedox1 said:

getmore4less said:

get your money back and split 50:50

increase is (£425k-£387k)  £38k £19k each

P2= (£166,500-£144,000) + £19,000 = £41,500

Thanks getmore4less. Can I ask, how did you calculate the £387k?
Seperating our original investment and splitting 50/50 seem fairest to both of us in my opinion.

The home improvements were carried out over the last 4 years. All "removables", such as furniture, appliances were excluded.
I do have dates of when each project was finished but I'd rather not go down the IRR route.

Hope I got it right it was a quicky

£330k purchase deposit+mortgage(50:50)
£3,500 buying costs(?SDLT)
£30k you
£11.5k oh
£12k Extra borrowing 50:50

That's the total cash input between both of you to purchase the place


Taking this into account

I think I prefer equal split because although I contributed more financially and with the labour she supported me throughout by running the house and contributing whatever she could.

Sound like you were on page to put in what you could with other social factors being generally equal supportive.

If there was an agreement at the start that should be used.

Thank you again, I appreciate your help. Without sounding like I’m challenging your method, I just want to learn and understand it. Some websites/blogs including conveyancing solicitor suggest you take the value less the mortgage balance to calculate the equity. Whats flawed in that method?

Theres no agreement in writing, like most couples who are setting up home together it wasn’t even considered! However we’re on good terms and both agree each should receive investment back plus half any increase in value. I’ve just been struggling to work it out!

thanks again

The mortgage buys a share of the property.

Use an edge case

100% mortgage paid 50:50 pretty obvious ownership is 50:50

Now one person puts £1 down they now own 100% if you take the mortgage off first.

If you want the get back what you put in and share the increase 50:50 that's the £41,500

The other way to do get your money back share the increase.
(Remember it is the same as lending the other person 1/2 the difference in inputs)

Current equity £425k-£288k = £137k
£68,500 each

P1=£66k
P2=£12k
1/2 the difference is £27k

P2 pays P1 that back from their share leaving £41,500

zedox1

getmore4less said:

The mortgage buys a share of the property.

Use an edge case

100% mortgage paid 50:50 pretty obvious ownership is 50:50

Now one person puts £1 down they now own 100% if you take the mortgage off first.

If you want the get back what you put in and share the increase 50:50 that's the £41,500

The other way to do get your money back share the increase.
(Remember it is the same as lending the other person 1/2 the difference in inputs)

Current equity £425k-£288k = £137k
£68,500 each

P1=£66k
P2=£12k
1/2 the difference is £27k

P2 pays P1 that back from their share leaving £41,500

Thank you for explaining!