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How it works
The calculator categorises contributions into two types: direct
contributions and indirect contributions.
Direct contributions are anything that directly reduces the size of
the mortgage and increases your ownership of the house. This
includes the deposit, monthly mortgage payment equity and any
overpayments.
Indirect contributions are any payments that do not reduce the size
of the mortgage but are part of home ownership (such as mortgage
interest, purchase/sale fees and taxes). I suggest excluding general
costs of living e.g. furniture, utility bills and council tax.
When calculating the return, we first return the direct
contributions as a 1:1 ratio (i.e. you get back exactly what you put
in). If the value of the house changes, we divide this difference as
a ratio of the total contributions (direct and indirect):
direct contributions + (sale value - original value) * proportion of
total contributions = return on sale
Why consider both direct and indirect contributions?
Divide by direct contributions only
A sizable portion of home ownership is paying towards mortgage
interest and home maintenance. If the house increases in value, all
contributions play a role in realising those profits. Ignoring
indirect contributions means that a sizable deposit or overpayment
will result in the smaller contributor not seeing a fair share of
the profits.
Example:
A couple buy a house for £400,000, where Person A puts down the
entire £40,000 deposit but they split the mortgage payments equally.
5 years later they decide to sell and the house is now worth
£500,000. They have made a total of £120,000 in mortgage payments of
which £40,000 has paid off the mortgage and the rest is interest. If
we divide the whole equity by direct contributions only, Person A
would get £135,000 and Person B would get £45,000. That means Person
A received £90,000 extra despite only contributing an additional
£40,000.
Divide by total contributions only
If we only divide equity by the proportion of total contributions,
this disadvantages the larger contributor as they are essentially
transferring some of their wealth to the other person.
Example:
Two people have contributed equally to the mortgage of a house worth
£100,000 but have paid £190,000 in total including interest. If one
person makes an overpayment of £10,000 to pay off the remaining
mortgage, they would lose £2,500 of that £10,000 to the other
person.
Unsolicted advice
Discuss expectations before committing
Often a taboo subject to discuss the practicalities of a
relationship ending, but it is very important before any sizable
commitment to discuss what your expectations are if things don't
workout. Most couples believe they will remain amicable after a
breakup but discussions can quickly deteriorate when it becomes
clear expectations of what each is owed do not align.
Try to keep indirect payments equal
Anything that does not directly contribute to paying off the
mortgage can be difficult to quantify the value of. While we account
for it slightly here most of these costs are lost, and therefore it
is easiest and fairest to equally divide those costs. For example,
if you have unequal deposits consider still splitting the solicitor
fees equally.