Buying a house with your partner is a huge step not to mention probably the biggest financial commitment you will ever have.
When you are happy in your relationship and thinking of buying a house together the last thing on your mind will be, what happens if we break up?! It really should be one of the most important questions you ask yourself and discuss with your partner. You should consider;
• How much each person is putting into the deposit?
• Any gifted deposits from family?
• Any family loans where for example your parents loan you the money and expect that one day you will repay it?
In this decade more people are buying houses together who aren’t married than ever before, if the relationship does end that you will wish you discussed these questions.
At our free advice law shop we see many people who have purchased a property with their partner and unfortunately the relationship has broken down and the property needs to be sold/transferred. More often than not their first question is, how much equity will I get? The answer depends on who owns what. If the property is purchased together, each can take their 50% share. However it’s rarely as simple as that.
Things become more complicated by that fact that one set of parents has gifted money to the couple to put towards the deposit, they may expect that money back from the sale proceeds. One party may have paid for a new extension or bathroom thus increasing the value of the property and expect to get a larger share of the sale proceeds.
Let’s consider this example, David (24) and Samantha (25), they start looking for properties and find their ideal home in Wallsend for £110,000. David has saved £3,000 and Samantha has saved £5,000. Samantha’s parents offer to give the rest of the money need to meet the deposit of £11,000 so they gift them £3,000. They decide that David will pay the mortgage from his wages and Samantha will pay the utility bills from her wages. Samantha gets a promotion and spends £3,000 on a new bathroom and kitchen a year after they buy the house. Eight years later they split up.
The house is now worth £120,000 and the outstanding mortgage is £82,000. David cannot afford to get a mortgage on his own therefore he wants to sell the property and move on. Samantha can afford to take over the mortgage.
David expects he will receive £19,000 on the basis the house sells for £120,000 less the costs of sale. However Samantha expects she will receive £24,500 which means David would be left with £13,500. David thinks he is entitled to 50% of the equity but now Samantha has asked for more he thinks maybe he should ask for more on the basis that he has always paid the mortgage and Samantha never once contributed. Samantha thinks she should get more than 50% because she paid a larger deposit, she needs to repay the £3,000 to her parents and she paid for the new kitchen and bathroom. Who is right?
Neither of them! The property is in their names, and unless there's some official paperwork to say their parents made a contribution, these finances will be tied up in the house. This means their parents may never get their money back. Unless they own the property as Tenants in Common in unequal shares then the fact Samantha paid more money towards the deposit is irrelevant.
If David and Samantha can't decide what to do, even with the help of a solicitor, the only other option is to take the matter to Court.
Making an application to court to settle this sort of arguments is expensive and time-consuming and the likelihood is, in our example, that David and Samantha would receive 50% of the equity each and it will be up to them to decide whether to repay the money to Samantha’s parents.
What can I do to prevent this from happening?
Well firstly, your conveyancer or solicitor should always discuss with you the options when you have a “gifted deposit” or purchasing in unequal shares. Please listen and take their advice.
Second option would be to consider a formal agreement has been put in place, like a Cohabitation Agreement.
A Cohabitation Agreement is formal document drafted by a solicitor that sets out what would happen to an unmarried couple's finances, should they split up. The Cohabitation Agreement will cover things like what happens to the house, how will the equity be divided, and debts that the couple have - how will they be repaid etc.
We understand that a Cohabitation Agreement appears to be a little pessimistic and hard to expect you will ever need when you are so happy in your relationship and waste of money but you never know when it may wish you had the protection of that agreement in years to come.
Have you ever purchased travel insurance, home insurance, and mortgage protection insurance? Why? Because you require the protection of the insurance should anything go wrong! You don’t expect that it will but you never know!