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planetflash
Posts: 2 Newbie
My partner and I are in the process of buying a house and realise we need a declaration of trust as our initial deposits differ. I've searched the internet and several posts in this forum about how we can calculate who gets what in the event of a separation should it occur. However, each way we do it seems unfair to someone, so how do we decide!? Please help us as it is hurting our brains.
We already have a solicitor and they are happy to put in whatever we decide and have offered several of the solutions outlined here. It's just that we can't decide what is fair.
Partner 1 deposit: £90,000
Partner 2 deposit: £10,000
House price: £410,000
Mortgage amount: £310,000
Assumed sale price after 5 years: £575,000
Percentage increase after 5 years: 140%
Mortgage capital repaid after 5 years: £43,200 (paid equally)
Mortgage remaining after 5 years: £266,800
Proceeds from sale after repaying mortgage: £308,246
Option 1: Return initial deposits, split remainder
Partner 1 receives: £90,000 + (£208,246/2) = £194,123
Partner 2 receives: £10,000 + (£208,246/2) = £114,123
Pros: Shares can't be diluted by investment at a later date
Cons: Partner 1 gets no return on investment
Option 2: Return initial deposits multiplied by % increase in property, split remainder
Partner 1 receives: (£90,000 x 140%) + (£167,991/2) = £210,225
Partner 2 receives: (£10,000 x 140%) + (£167,991/2) = £98,021
Pros: Partner 1 gets return on initial investment
Cons: Partner 1 receives less if Partner 2 invests at a later date via overpayments/renovations. Partner 2 feels hard done by as Partner 1 receives larger share.
Option 3: Floating shares with mortgage repayments
Partner 1 share = £111,600/£143,200 = 77.93%
Partner 2 share = £31,600/£143,200 = 22.07%
Partner 1 receives: £308,246 x 77.93% = £240,225
Partner 2 receives: £308,246 x 22.07% = £68,021
Pros: Partner 1 gets large return on initial investment
Cons: Partner 1 receives less if Partner 2 invests at a later date via overpayments/renovations. Partner 2 feels very hard done by as Partner 1 receives much larger share.
As you can see, due to the large difference in initial deposits, which way we cut it results in quite different incomes.
Things we're struggling with:
Partner 1 explaining to Partner 2 reasons why he should get a larger return given a larger initial investment
Understanding why if Partner 2 invests at a later date via overpayments or renovations why the amount of money that Parter 1 receives would go down.
Ultimately deciding which method is the fairest.
Is there something we're missing? Is our maths off? Or is it just a hard decision to decide what to do?
We already have a solicitor and they are happy to put in whatever we decide and have offered several of the solutions outlined here. It's just that we can't decide what is fair.
Partner 1 deposit: £90,000
Partner 2 deposit: £10,000
House price: £410,000
Mortgage amount: £310,000
Assumed sale price after 5 years: £575,000
Percentage increase after 5 years: 140%
Mortgage capital repaid after 5 years: £43,200 (paid equally)
Mortgage remaining after 5 years: £266,800
Proceeds from sale after repaying mortgage: £308,246
Option 1: Return initial deposits, split remainder
Partner 1 receives: £90,000 + (£208,246/2) = £194,123
Partner 2 receives: £10,000 + (£208,246/2) = £114,123
Pros: Shares can't be diluted by investment at a later date
Cons: Partner 1 gets no return on investment
Option 2: Return initial deposits multiplied by % increase in property, split remainder
Partner 1 receives: (£90,000 x 140%) + (£167,991/2) = £210,225
Partner 2 receives: (£10,000 x 140%) + (£167,991/2) = £98,021
Pros: Partner 1 gets return on initial investment
Cons: Partner 1 receives less if Partner 2 invests at a later date via overpayments/renovations. Partner 2 feels hard done by as Partner 1 receives larger share.
Option 3: Floating shares with mortgage repayments
Partner 1 share = £111,600/£143,200 = 77.93%
Partner 2 share = £31,600/£143,200 = 22.07%
Partner 1 receives: £308,246 x 77.93% = £240,225
Partner 2 receives: £308,246 x 22.07% = £68,021
Pros: Partner 1 gets large return on initial investment
Cons: Partner 1 receives less if Partner 2 invests at a later date via overpayments/renovations. Partner 2 feels very hard done by as Partner 1 receives much larger share.
As you can see, due to the large difference in initial deposits, which way we cut it results in quite different incomes.
Things we're struggling with:
Partner 1 explaining to Partner 2 reasons why he should get a larger return given a larger initial investment
Understanding why if Partner 2 invests at a later date via overpayments or renovations why the amount of money that Parter 1 receives would go down.
Ultimately deciding which method is the fairest.
Is there something we're missing? Is our maths off? Or is it just a hard decision to decide what to do?
0
Comments
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goodness knows how many times this question crops up on here
there is only 1 fair way, each person is 100% exposed to 100% of the ups and 100% of the downs of the % of the property they own, having paid for their share by injecting a deposit lump sum, and then paying 50% of the remaining funding (ie the mortgage) to acquire their respective shares
if partner 2 is going to be bitter and twisted because partner 1 gets more from the property, then partner 2 should not be a partner at all, and should go off and buy their own investment on their own0 -
I would go for option 1 and when I bought with my partner we never considered otherwise. When you say 'partner 1 gets no return on investment', the return is the increase in house price (which seems a very ambitious figure but that's another matter!). Yes, you don't get a bigger return than partner 2, but when you contribute jointly and equally to the mortgage and all renovations it seems fair enough.
The other options get confusing otherwise, who contributes to what, and I can imagine could build some resentment and result in disagreements between partners of who should pay for what.
In my eyes, as long as each partner gets out at least what they put in, the rest is a bonus to be shared.0 -
In my eyes, as long as each partner gets out at least what they put in, the rest is a bonus to be shared.
so partner 1 injects x9 more than partner 2 but you think it fair that partner 1 gets back 90k without any impact of inflation?
5% inflation
partner 1 loses £450
partner 2 loses £50
totally unfair0 -
I can see why partner 1 would want to protect their deposit when it's so much larger than partner 2 but to quibble over a few grand when you've tens of thousands in equity seems a bit petty/greedy in the grand scheme of a committed relationship.
Me and my other half are in a similar situation and went for option 1, I'm partner 1.
And a 40% price rise in 5 years? You're having a laugh! So it's probably all much less of an issue realistically...0 -
The only problem is you only done examples based on house prices rising not crashing.0
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[FONT=Verdana, sans-serif]Option 2 is the correct choice.[/FONT]
[FONT=Verdana, sans-serif]So your basic DOT will say that on a sale and after paying sale fees and the outstanding mortgage you split what's left:[/FONT]
[FONT=Verdana, sans-serif]Partner 1: 21.95% (90/410) of the gross sale price less cost of sale plus half of remainder.[/FONT]
[FONT=Verdana, sans-serif]Partner 2: 2.44% (10/410) of the gross sale price less cost of sale plus half remainder.[/FONT]
[FONT=Verdana, sans-serif]The above formula works fine whilst the mortgage, including and mortgage overpayment is paid 50/50 and there is no added value work carried out.[/FONT]
[FONT=Verdana, sans-serif]When it gets complicated is either where only one party makes a overpayment or one/both parties pay for improvement works which will add value.[/FONT]
[FONT=Verdana, sans-serif]
[/FONT][FONT=Verdana, sans-serif]Then you need to revalue the property at that point in time and work out how much additional share these extra amounts are buying.[/FONT]
[FONT=Verdana, sans-serif]
[/FONT][FONT=Verdana, sans-serif]Lets say when the house is now worth £500,000 Partner 1 overpays £20,000 off the mortgage. The will therefore, at that time, have bought 4% of the property (20/500). Therefore their initial cut on any future sale should now be 21.95% + 4% = 25.95%[/FONT]
[FONT=Verdana, sans-serif]
[/FONT] [FONT=Verdana, sans-serif]You can do the same with renovation costs. Lets say when the property is worth £500,000, £100,000 is spend, £80,000 by Partner 2 and £20,000 by partner 1. Also after the spend the property has increased in value by the same £100,000 to £600,000.
Just before the work Partner 1 will have an initial cut or 21.95% x £500,000 = £109,750, plus the £20,000 for work = £129,750 = 129.75/600 = 21.625% of new £600,000 house value.[/FONT]
[FONT=Verdana, sans-serif]Partner 2 will have an initial cut of 2.44% x £500,000 = £12,200 plus £80,000 for work = £92,200 = 92.2/600 = 15.37% of new £600,000 house.[/FONT]
[FONT=Verdana, sans-serif]
[/FONT][FONT=Verdana, sans-serif]After making these adjustments to the initial cuts, the remainder is still split 50/50 providing that's how the basic mortgage payments continue to be split.[/FONT]
[FONT=Verdana, sans-serif]
[/FONT][FONT=Verdana, sans-serif]The above figures assume the £410,000 purchase price is the total including costs, legal stamp duty etc. [/FONT]0 -
Surely it's not worth buying together if you're already considering how it will all be split.0
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There are 2 basic ways
The get your money back then split 50:50(having paid 50:50)
this is the equivalent to lending the OH 50% of the deposit on an interest only basis
equity based
You own the share of the property you paid for and the debt you service
you get back that share from net sale(before mortgage is paid off) and pay your share of the mortgage from that.
if you want to go the second route start by forgetting that it is a mortgage that is just a method to raise the cash
pretend you got the money independently that should help understand what you are buying.
if the person with the lower deposit is income rich or will get money they can invest later then you can balance by buying 1/2 each, splitting the debt differently to 50:50 to get that balance.
to get round your invest/overpay conundrum
You invest in the property at the ownership % and never change it, that keeps it really easy.
Overpayments change the debt you owe not the share of the house.
if you can't get your heads round the equity options then go for the really simple one.
lend your OH £40k so the deposits are equal at £50k each
own 50:50, mortgage 50:50
all improvements maintenance and mortgage get paid 50:50.
Decide the terms of the loan, interest free, mortgage rate 10% and a term, 10 years 50 years, forever(interest only). whatever
Set up a payment plan on the side for that £40k loan.0 -
Thanks for all your help so far. Some interesting things to consider.goodness knows how many times this question crops up on hereThe only problem is you only done examples based on house prices rising not crashing.Surely it's not worth buying together if you're already considering how it will all be split.
s worth protecting the largest investment we're ever likely to make for any eventuality.And a 40% price rise in 5 years? You're having a laugh! So it's probably all much less of an issue realistically...0 -
planetflash wrote: »Don't be so ridiculous. Best to plan for eventualities as per all other advice we've received. Also, it would be utilised in the case of a death, not just a relationship breakdown. It
s worth protecting the largest investment we're ever likely to make for any eventuality.
I agree, if you don't trust your partner it's absolutely worth it.0
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