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My partner is moving in with me, and will start paying a percentage of the mortgage (based on our incomes). I already bought the house before we met each other so both the house and the mortgage are in my name. We want to make sure to keep track of everything in case we do decide to go our separate ways.

We've done a taxation on the house to determine the value of the house the moment that she starts also investing in it. It will be easy to keep track of how much she has invested in total, but we're struggling to find a good way to deal with the house increasing or decreasing in value.

One idea that I had was to take into account the moment in time that the money was invested. So for example (using simplified numbers):

  • She moves in on 01-01-22 and she moves out on 01-01-23 (so exactly one year)
  • Each month she invests €100 net.
  • The value of the house at 01-01-22 is €100,000
  • The value of the house at 01-01-23 is €200,000

We calculate the worth of the house at each month by linear interpolation

  • 01-01-22 => €100,000
  • 01-02-22 => €108,333
  • 01-03-22 => €116,666
  • etc

Then we calculate the percentage that the house has increased in that month

  • 01-01-22 => 200%
  • 01-02-22 => 191%
  • 01-03-22 => 183%
  • etc

Finally we can calculate the current value of the investment

  • 01-01-22 => €100 * 200% = €200
  • 01-02-22 => €100 * 191% = €191
  • 01-03-22 => €100 * 183% = €183
  • etc

This would result in her total investment at 01-01-23 having a value of €1,714.59. So this way she would benefit from increases in the value of the house, while also keeping it fair when the value decreases.

Is this an idea that makes sense, or is it really stupid? Or are there better ways to do this fairly?

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    In the example: "Each month she invests €100 net" -- what exactly does net mean? What are you subtracting out?
    – nanoman
    Dec 12, 2021 at 18:32

3 Answers 3

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You need to decide if your goal is to have your hypothetically broken-up partner end up with things accounted for as if she had been an emotionally uninvolved roommate/investor all along, or if you want to extend some financial support to her while you live together that you will never claw back. Your question is not clear on this.

One thing that may help is to think about what you would do if you rented rather than owned your home. Would you split the rent 50/50 (because you equally share the benefits of living there) or would you do it "based on our incomes"?

will start paying a percentage of the mortgage (based on our incomes)

Given that you're planning for her to acquire a dynamically calculated ownership share of your home, and assuming you intend to treat her financially on an "unemotional" basis, this income-based split is fundamentally arbitrary. Whatever amount she contributes, you will end up compensating for in the end. So arguably it should be her choice how much to invest in your home (and hence how much of a share to acquire), like other investments. And if you never break up, and become a permanent "what's mine is yours" couple, then it won't matter who paid what because it's all in the same bucket anyway.

A source of confusion in questions like this is that people have multiple roles. Taking the unemotional viewpoint: You start as a homeowner, mortgage debtor, landlord, and tenant (your half of the use of the home, you effectively rent from yourself). Your partner starts as a tenant. As your partner acquires increasing ownership of the home (assuming she pays you more than what her "fair" share of market rent would be), she also becomes a partial homeowner and partial landlord, which changes the net rent payment. However, unless you additionally agree to lend money between yourselves (which you don't mention), she does not become a debtor or creditor.

A good approach is to first consider all the roles separately, decide what's fair in each, and then net the payments out.

The main thing that seems odd about your proposal is that, by turning the entire amount she pays into ownership of the home, it assumes that her rent should be zero. She doesn't yet own half the home and presumably won't for a long while, but she will enjoy half the benefits of living there in the meantime, and you don't mention charging her for that. However, it is not clear if this is an intentional decision. Perhaps, if you ponder further, it may be the rent that you actually feel like splitting based on income.

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What's fair varies from person to person. Here are some of my thoughts about your model.

Your model did not consider that not all €100 from your partner goes to the Principal Portion of the Monthly Payment.

For example, in a loan of 100k for 25 years, in the 1st month, only 61% of the payment goes to Principal Portion. The rest goes to Interest Portion. In the 12th month, only 62% of the payment goes to Principal Portion.

Your model simply provides interest-free loan to your partner, while you are paying the whole portion of interest to the bank.

The correct way to track the Principal Paid / Total Principal is using Amortization Table.

Example

  • You bought the property in Jan 2012 for €100k at 2% interest for 25 years with 0%. Monthly payment is €423.85.
  • Your partner joined you in Jan 2022 and start paying you €100.
  • In Jan 2022, the principal portion is €314.08 of €423.85 (i.e. 74.10%). Therefore, when your partner paid €74.10 of €100k. The partner owns 0.0741% of the Market Value upon exit.
  • In Feb 2022, the principal portion is $314.60 of €423.85 (i.e. 74.22%). Therefore, when your partner paid €74.22 of €100k. The partner owns additional 0.07422% of the Market Value upon exit, in total the partner now owns 0.14832% of the Market Value upon exit.
  • Repeat calculation for each month until exit.

This method allows your partner to increase payment from €100 per month up to the whole mortgage monthly payment (i.e. €423.85 in this example). However, when the actual mortgage's time is up, the partner cannot pay you anymore.

Your model assumes that the property has linear pricing from the formation of partnership to dissolution.

This is not realistic.

For example, consider that you bought a property in 2000 for €100k. In 2007 it became €200k and your partner joined you. Then there was a financial crisis in 2008-2011 and by 2011 it became €150k. In your model, you would have made your partner "lost 25% money" because you assumed that the partner held from €200k to €150k. In reality, you bought it at €100k and "made 50% money" from 2000 to 2011. Taking into the fact that you charged your partner "-25%", you made even more than 50%, which is not fair.

A mortage is different from a Real Estate Investment Trust. You entered the housing market at the beginning, and neither you nor the partner "purchased" the property under a Dollar Cost Averaging.

On the other hand, if you bought the property literally decades ago e.g. 1950, should the great gains from 1950 to 2007 be shared with the partner? Probably not. In that case, the model should use a "step up" cost basis of the property as if you "re-mortgaged" the loan upon formation of the partnership, similar to your proposal but using amortization table instead of "linear interpolation of start and end market value".

Example

  • You bought the property in Jan 2012 for €100k (p.s. irrelevant) at 2% interest for 25 years with 0% downpayment.
  • By Jan 2022 the outstanding principal portion is €65866.14 (p.s. irrelevant) according to amortization table, but the market price of the property is €150000.
  • You draw a contract of a loan (you as lender and partner as borrower) that has a monthly payment of 100 at 2% interest for 25 years. Using financial calculators, such monthly payment can afford a property of €23593. If the partner paid €100 for 25 years = 100 x 12 x 25 = €30000, the partner would have paid €23593 principal and €6407 interest (of which some will be passed to your bank if you still have actual mortage).
  • Essentially, the partner entered the housing market by buying €23593 of €150000 of your property.
  • Whenever the partner wants to exit, the partner owns 15.7287% of the Market Value, minus the outstanding principal of the €23593 loan. What the partner gets has nothing to do with "linear interpolation".

If the €100 monthly payment suddenly increased after a while, it is considered as "Early Repayment of Loan". The entitled ownership is still 15.7287% of the Market Value, minus the outstanding principal of the €23593 loan, otherwise, the partner could have said "I'm paying you additional €126407 as if I owned 100% of the property and the partner takes the guaranteed retrospective profit. Of course you can formally "re-mortgage" the loan with your partner.

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    1. In OP's model, there is not a loan (let alone an "interest-free" one) between OP and partner. The mortgage is between OP and the bank. While partner's payments are termed "splitting the mortgage", this is just a cash-flow description. Partner isn't receiving a lump of cash or equity as a loan they have to pay interest on. But as my answer notes, partner may need to pay rent. 2. The discussion of past gains is confusing and arbitrary. Gains from 7 years before becoming a couple should be shared with partner, but gains from 57 years before shouldn't?
    – nanoman
    Dec 12, 2021 at 10:21
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What we went with is a simpler version of my post. For my initial idea I was treating it as if someone was spending a fixed amount of money into stock each month while the stock goes up in value. And because the stock goes up in value you buy less each month.

My mortgage however is fixed. It stays the same even if the house increases or decreases in value. Therefore, buying a "stock" in the house always costs the same.

So what we went with instead is to simply keep track of all money she has invested in paying the mortgage (minus interest), and then scale that by the increase or decrease of the value of the house when it is either sold or we break up.

So if she paid of €10,000 and the value of the house increased by 10% I will pay her €11,000. If the value instead went down by 10% I will pay her €9000.

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    If you've decided on this, I guess you may no longer be looking for input -- but FWIW, this doesn't strike me as sensible. Regardless of whether your mortgage debt is large, small, nor nonexistent, she owes you rent for living in your house. You seem to be using the mortgage interest as a proxy for rent, but any equality between the two is coincidental. In the extreme, if you'd put 99% down on the house and got a tiny mortgage for the remaining 1%, your scheme would have her living with you essentially for free -- is that what you intend? ...
    – nanoman
    Dec 24, 2021 at 2:41
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    ... The consistent approach would be either (a) she is paying rent and possibly acquiring ownership shares with additional payments, or (b) she "borrows" from you to buy a share of the house up front and then is repaying you this loan. Your asset (house) and debt (mortgage) are independent except that one is secured by the other. By taking the principal of the debt and applying the rate of return on the asset, you are mixing apples and oranges.
    – nanoman
    Dec 24, 2021 at 2:42
  • She is literally paying part of the mortgage, how is she "borrowing" or "renting" or "living for free"? Dec 24, 2021 at 9:30
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    The mortgage payment (or specifically the interest, since you are planning to give her back the principal) is not directly related to the value of living in the house. What she is paying depends on extraneous things like how much you put down on the house versus how much you borrowed. Presumably she didn't contribute to the down payment. Your scheme is arbitrary since the more you happened to put down, the less she pays.
    – nanoman
    Dec 24, 2021 at 13:28
  • The less she pays, the less she gets back. If she would pay €1 a month (excluding interest) I would owe here a whole €12 a year. I don't see how that is arbitrary in any way, that's how much she payed, and how much I payed less for the mortage. As for the division of the cost of the mortgage (50/50, ratio over net income, etc) is a whole different topic. Dec 24, 2021 at 14:08

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