Confused about splitting mortgage

[firebrand123]

This is a bit of a long story and I'm possibly massively overthinking so please bear with me!

Partner and I bought a house 5 years ago so our fixed term mortgage is ending. I paid the deposit from the sale of a previous property, he paid all moving expenses, we got a memorandum of trust setting it all out and have split the mortgage and bills 50/50 since.

In the meantime, my dad died without a will. The estate is taking forever to go through the courts but should be finalised soon. I don't know how much I'll inherit (it's too complicated and it's also all happening abroad) but it will be significant. I definitely want to put the money into the house as a) investing stresses me out, especially the tax implications and b) I just want to get away from having a mortgage ASAP.

We were lined up to move onto a tracker mortgage next month but as the amount will be more than 10% of our mortgage, we're thinking of ditching that (we're in the cooling off period) to go onto a variable mortgage as the additional mortgage cost will be less than the early repayment fees of the tracker product, as my inheritance should be sorted in the next month.

So I guess the first question is does that all sound sensible and then if yes, how do we calculate what my partner should pay and I should pay towards the mortgage after I put that lump sum towards the house? I want to make sure I'm not short changing myself in terms of financial benefit but also conscious he earns a lot less than me so can't take on more than he can afford.

For example, say I was able to pay off £200k of our remaining £350k mortgage, ie 60%, how would we calculate how we should split the future monthly payments fairly? We'd then need to look at affordability for him, but I've tied my brain in knots thinking about interest saved by reducing the mortgage amount, interest I could earn if I was to invest instead, etc, and can't see the wood for the trees!

Firstly you need to make sure you protect your interest and that the property is owned as tenants in common not jointly. You will need to speak with a solicitor to check and I would also ask them how to ring fence your contribution. Don’t skip getting legal advice as you are not married.

in terms of what he pays I think you are looking at this the wrong way round. Rather than try and work out what interest you would have received you need to wrap that into the percentage of the property that you own (to be sorted via the solicitor). You then split the monthly mortgage payments either equally or pro rate of one of you earns a lot more.

Thanks @FoxglovesAndLupins

We are tenants in common, that was all discussed when we set up the memorandum of trust at time of purchase. Clearly that will need updating/reviewing.

I'm not sure I follow what you mean by wrapping the interest into the percentage of property I own... do you mean not worry about how we split the monthly payments so much as ensuring it's documented legally what portion of the property is mine? So it's more of a long term investment approach then monthly financial benefit?

I understand that your preferred option is to pay down your mortgage. But have you done the maths?

I'm making assumptions here...
Your mortgage rate is 4.5%
Your current mortgage term is 25 years
If you invested, you'd get 10%
You're a basic rate tax payer

Option 1
Pay down your mortgage by £200k and continue with the same monthly repayments of approx £1850. You pay off your mortgage in 8 years.

Option 2
Invest in a global tracker for 8 years. Take financial advice on the product. You'll pay tax on your interest, but in 8 years time you'll have £381k in savings after tax. That will allow you to pay off your mortgage in full at the 8 year mark and also have £106k left in savings.

Please think very carefully.
You're £106k better off if you invest over 8 years.

What tax implications do you find stressful about investing? Can we help you feel more comfortable about this option?

Edited to add that over the course of the 8 years, you max your 20k isa allowance into a S+S ISA. So that by the time you pay off the mortgage, your remaining £106k is tax free

The investment option could be overly optimistic on the potential returns which are not guaranteed. You could even end up with less than your original investment.

There are several options if you do reduce mortgage amount. E.g paying less each month or reducing the term with monthly payments the same. An alternative could be an offset mortgage where you put your inheritance in an account to offset the balance and both continue to own and pay equally. This does just push the answer to the future as you will need to decide what to do when the account balance exceeds the outstanding mortgage

Thanks @Seamoss

I'm in the higher tax bracket (£85k salary plus bonus) so am concerned about pushing myself up even higher. It also just stresses me, generally. I'm prone to anxiety (diagnosed, not just a worrier), have a busy job, kids, etc, so would really struggle with the headspace of it all. I used to rent out my old flat and just that made me super stressed, as did having to do a tax return before I stopped getting child benefit, even when I'd sold the flat so didn't have that to worry about. It's just something about money and finances that triggers me.

I'm also nearly 49 and am keen to get my mortgage paid off so that it's also one less thing to think about.

That's it right there. The idea that I could lose my investment if I'm not all over it would keep me up at night!

Not exactly what you’re asking but you can get tracker mortgages with no early repayment penalties. Likely to be cheaper than a standard variable rate.

As above comment I'm surprised tracker mortgage has an early repayment or breakage penalty, it's a variable rate and usually it's only a fixed rate product has a penalty to break. Double check that aspect of it.

I'm definitely more in the camp of pay off the mortgage rather than invest, bird in the hand and all that, who knows what the future brings investment wise in the world we are now in!

TBH if its going to stress you out that much, working out the interest the other party has to pay

Then going on your calculations of

mortgage £350k and you pay off £200k

he would need to be paying you rent if you put in 60%, or you pay off 50% of the mortgage and he pays then from that point going forward and you don't

then you put the remaining 10% into savings or pension

I suspect it would be much more straightforward to treat this as you buying a chunk of equity in the house, adjusting your percentage ownership accordingly and then both continuing to pay equal shares of the mortgage going forward.

I agree. Reducing the mortgage will definitely be a big advantage and no hassle. You can adjust the proportions you own the house with a solicitor.

I'm sorry but to say that investing you WILL get 10% a year is madness. You MIGHT get 10% a year. On the other hand you might lose money.

OP - paying off a huge chunk of the mortgage sounds like a good idea - and as for how to split the payments thereafter there is really no right answer ... the question is how much of the payoff do you want to benefit you vs your partner? At one end of the spectrum you could simply say they should keep paying the whole mortgage and you pay nothing because you have already paid off "your" half of the mortgage. At the other end you could pay off that chunk and split the remaining mortgage 50/50. There is an infinite number of points in between that, which is really up to you.

Well I said that I was making assumptions, and one of my assumptions was a 10% growth on investments.

One year you might see 20% growth, another year -5% (so that year, yes, you'd loose some money) but on average over time, I was assuming a 10% growth as an average.

But if you, or the OP don't want to invest, that's no skin off my nose. It's just an option everyone has.

For anyone who is doubtful of the returns, I'd suggest just investing a little each month, £50 for example, in a global index fund and see if how you feel changes in 5 or 10 years time.

Thanks everyone, this has been super helpful!

You began by stating 10%pa as an assumption, but then went on to say:

Please think very carefully.
You're £106k better off if you invest over 8 years.

No - you MIGHT be £106k better off : you also might be worse off.

You then went on to say:

For anyone who is doubtful of the returns, I'd suggest just investing a little each month, £50 for example, in a global index fund and see if how you feel changes in 5 or 10 years time.

Investing £50 is a world of difference away from £200,000. You might put £50 on a horse. You wouldn't put £200,000 on a horse. This is a once in a lifetime sum that is being considered here, and needs to be treated accordingly.

Whilst no-one knows the future for sure, and it's definitely true that over very long periods the stockmarket has done well, there are many measures that show right now this minute US stockmarket is the most overvalued it has ever been - certainly in our lifetimes. It could very VERY easily fall 50% in the next 12 months, and not recover in 5 years. Will that happen? Maybe, maybe not. But I wouldn't risk a once in a lifetime £200,000 on it personally.

Everything I said was based on the assumptions I listed at the start.

People have different attitudes to risk. That's ok. But as humans we are very bad at judging risk.

Any investment into stocks/ETFs etc should be suitably diversified across geographies, industry etc to avoid overexposure and balance risk appetites over time.

please get financial advice on your specific situation @firebrand123

You’re tenants in common, so presumably you own a greater share of the property. For example you might own 60% whilst your partner owns 40%.

If you jointly owe £350k then if you pay off £200k this is £175k more than what you personally owe. It would be you giving your partner £25k. Oh and every future £1 you pay towards the mortgage would be a gift to him too seeing as you will have paid off your half of the mortgage already…

The simplest solution is for you to pay what you owe (£175k) - so you personally are mortgage free whilst your partner continues to pay what they are left owing - he won’t be taking on more or less - his situation will not change. You are tenants in common remember!

And you can use the money you would have paid the mortgage into your own savings or pension etc.