Re Mortgaging and adding my partner

RGBSE

I am currently the sole owned of my home   valued at £420000 and have a mortgage of £89000.  I am just about to remortgage and borrow additional funds for an extension / home improvements  ( additional £140000 so the total mortgage will  be £230000( with fee ) .

My partner will be taking this new mortgage on  with me (a 50/50 split £115000 each ) .

I wish to ring fence my existing equity and my question is how do I work out how much this is given the new borrowing ? Also what is the best way to do this ? I will be using a solicitor. 

We anticipate that the property will significantly  increase  in value one the work is completed. 

Thankyou in advance for your thoughts / advice on calculations . 

Exodi

Many ways to skin a cat, as they say.

In terms of the process, you'd be holding the house as 'tenants in common' with a 'deed of trust' in place. A deed of trust is just a document that enables you to lay out in detail how the proceeds should be shared between you (as opposed to just owning the house jointly). It's mostly used where one person is bringing in a disproportionate amount of money.

I usually love getting into the sums of this sort of thing, however it's a highly risky proposition given that renovations often don't add to the house price what they cost, meaning it's possible there will be a big hit to equity (and the sums are quite awkward as you would effectively need to decide whether your partner should share in the potential big initial hit to equity or you shoulder it... if the former your partner could be in a negative equity position almost immediately). A simpler solution could be you get the first £331k of any equity and split the rest, but again due to a potential upfront equity impact, it could be that your partner ends up being entitled to nothing for quite a while.

RGBSE

Thankyou , so maybe it would be better to work out my share  as a percentage rather than a some of money ? Is this something a solicitor can support with ? My partner has suggested he would own around 28% of the property by taking on his share of the mortgage( £115000 ). We both want this to be fair but are in all honestly a bit clueless when it come to this part . 

Exodi

You can do either - the solicitor is drafting the deed of trust to your instructions but they would not be telling you how you should split your money.

I'll try help a bit, and I'll also highlight the problem I have with your particular scenario.

Ordinarily you would look at the current situation and see that you have a house worth ~£420k and have a mortgage of ~£90k, ergo ~£330k of equity that you are bringing to the table.

If, just for the sake of keeping things simple, we assume that the £140k of additional borrowing will directly translate to an increase in the house price, you would then have a house worth £560k with with a mortgage of £230k, the difference being your ~£330k equity, all checks out.

Then there are typically two main methods of splitting that are discussed (but of course you can do it any way you like).

1. Simple Fixed - your deed of trust stipulates that ~£330k gets returned to you first, then anything else gets split 50/50.

2. Total Cont % - including the mortgage, you calculate that you are putting in £330k+£115k in total and your partner is putting in £115k. As a percentage, this means you've contributed ~80% of the total contributions and they've contributed ~20%. You then stipulate that the proceeds are divvied up in line with these percentages, with half the outstanding mortgage then deducted from each share.

Let's say in 3 years time, the mortgage balance is now £210k and the house has increased to £640k

To go through both scenarios:

1. Simple Fixed - the mortgage is paid off and £430k equity remains. You are given the first £330k, and then the remaining £100k is split in half, meaning you get £380k in total and your partner gets £50k.

2. Total Cont % - 80% of the £640k is assigned to you, or £512k. Once you pay half the outstanding mortgage, you are left with your share of £407k. 20% of £640k is assigned to your partner, or £128k. Once they pay the other half of the outstanding mortgage they are left with their share of £23k.

The main reason for the discrepancy in the outcome of the above is that in the simple scenario the initial contribution is a fixed amount, whereas in the second scenario it is a percentage. This means when the house price goes up, your initial contribution benefits from this increase, which it wouldn't under the simple scenario. Personally I think option 2 is 'fairer' but it has some practical flaws, which leads me nicely into my problem with your particular scenario...

Above we used a hypothetical scenario where the cost of renovations directly translated to an increase in the house price, where in reality this is often not the case.

So let's consider a different scenario. Let's say in 3 years time, the mortgage balance is again now £210k, but the house is worth £540k.

To go through both scenarios:

1. Simple Fixed - the mortgage is paid off and £330k equity remains. You are given the first £330k, and that's it.

2. Total Cont % - 80% of the £540k is assigned to you, or £432k. Once you pay half the outstanding mortgage, you are left with your share of £327k. 20% of £540k is assigned to your partner, or £108k. Once they pay the other half of the outstanding mortgage they are left with their share of £3k.

You can see that in both scenarios after 3 years of contributions your partner is left with very little/nothing. This is because you ring-fenced your equity before the equity took a big hit, meaning they've effectively immediately absorbed it with you out of any equity they would have otherwise built at the start.

And as we recommend all people to do, consider a third scenario. Let's say in 3 years time, the mortgage balance is £210k but the house is worth £500k

To go through both scenarios:

1. Simple Fixed - the mortgage is paid off and £290k equity remains. You are given the first £290k, and that's it.

2. Total Cont % - 80% of the £500k is assigned to you, or £400k. Once you pay half the outstanding mortgage, you are left with your share of £295k. 20% of £500k is assigned to your partner, or £100k. Once they pay the other half of the outstanding mortgage they are left with their share of -£5k. There is only £290k of equity available to split, so what this effectively means is your partner owes you £5k.

You can see it can become quite awkward, hence why I didn't want to necessarily put figures behind it as of the three scenarios I've outlined, the first is the most unlikely, in my opinion.

If you're the one driving these renovations and he's just coming along for the ride, it might be more reasonable to calculate your initial contribution after the impact of the renovations is understood (but this would require you to do another deed of trust in the future).

Anyway, hope that helps.

RGBSE said:

My partner has suggested he would own around 28% of the property by taking on his share of the mortgage( £115000 ). 

His logic is flawed as it doesn't consider the impact on the house price or the amount you are contributing. If you follow his logic, you would then own £305k/£420k = 72.6% (you can see that £25k of your current equity has already vanished)? If the renovations then add £100k to the value of the house and you immediately sold, his proposal would see that he is entitled to ~28% of £520k or £142.4k, or after paying £115k towards the mortgage, £27.4k almost immediately. Conversely, you would get £377.6k, or after paying £115k towards the mortgage, £262.6k... not a great outcome for you when you're currently sitting on £330k of equity and he's sitting on zero.

As I said above, the actual split would be around you ~80%, him ~20%, in reflection of your contributions as a percentage of the total contributions (not the house).

FWIW, his logic would work ordinarily (it is effectively the Option 2 I describe), but your situation is quite nuanced (hence my reluctance to originally comment).