Tenants in common

[neilbhoy]

Hi,

My partner would like to invest some money in my house by helping to pay off some of my outstanding mortgage. However we don't know how to agree what share of the sale value she would get should we spilt up in future. How should we work this out?

[Hammer]

The easiest way would be to get a couple of valuations from estate agents (or agree a value between yourselves), then divide the amount she is paying off by the value of the house. The value of your outstanding mortgage would be irrelevant.

For example, if the house is worth �150k and she pays of �50k of your mortgage, she would own 50 / 150 = 33% of the property.

She should then get 33% of the sale price when you sell. Again, your mortgage balance is irrelevant.

[Loosehead]

Well the simplest way is to figure out what proportion of the equity he is repaying and he should be entitled to that proportion as a percentage, plus a proportionate share based on future contributions to the remaining mortgage, he therefore shares in any growth or shrinkage in the value of the property. For example, in round numbers, suppose your house is valued at �200,000 and you have an outstanding mortgage of �100,000. now if your partner pays �50,000 into the mortgage he has 25% of the equity in the property from the time he pays it. Now if you both work together to pay off the remaining �50,000, ie share the mortgage payments, then at the end he will own half the proportion of the whole that you had outstanding when the arrangement started. Ie half of 25% (that was the percentage equity outstanding when he paid the �50,000). So when all paid off he will own 37.5% and you will own 62.5%.

[Loosehead]

If the above is unclear post the figures I'll work it out and you should see what's going on more easily with real figures.

Hammer, the mortgage left is relevant because presumably they will be living in the house and both paying the remaining balance. It is fair then that the partner should gain some equity from the remaining payments, otherwise it is effectively rent, which is fine if that's what's agreed of course.

[Hammer]

Fair point, I was assuming that the mortgage would be continued to be paid by neilbhoy. Thinking about it further, my idea probably works better for someone investing in the property but not living there.

[Hammer]

In that case, you need to make two calculations.

1. As I suggested earlier to decide how much of the property she owns now.

2. She should be entitled to a proportion of the price movement between now and the future sale, based on the proportion of mortgage payment she makes going forwards.

For example, if the house is worth �200k today and she pays �50k off the mortgage, she owns a quarter of the property. If she also pays 50% of the mortgage payments monthly she should own 50% of the profits between now and the future sale. So if you sold in 5 years time for �300k, she should get:

(300k x 25%) + (100k x 50%) = 75k + 50k = 125k

Hang on a minute, that's what you said!!

[Harley]

You still need a Tenants in Common Agreement and you should also make wills to make your wishes clear about what should happen to your share and how soon the house should be sold in the event of death.