Over the years whether it’s friends, siblings, couples splitting up or others, I’m constantly asked, ‘what’s the fair way to split a house’? They feel there should be an official solution, but in truth it’s not my subject and, outside of divorce (which has a host of its own issues), I’m not aware of one. After being asked again the other day, I started to consider options…
The challenge is to take discretion out, to ensure it’s fair with all parties, whether it’s just selling the house and dividing the proceeds or one party buying off the other. The main brick wall comes when people have put in different contributions such as deposits, so I’ve played around with a few ways on the back of an envelope and would love your views.
Three simple systems
When thinking about this and trying to conjure up simple answers I came up with three routes.
- Equal split – you get your money back and split the rest. Quite simply you add up what everyone has paid in (for simplicity we’ll just talk about the mortgage rather than any building work on the house, though that should be included). Everyone gets their money back and the rest of the proceeds are split equally. The problem with this is it doesn’t reward those who put the cash in.
- Proportionate split – split the proceeds in proportion to what was put in. Here you react the other way. You say ownership is due to payment, so any proceeds are split in that proportion. The problem is this can overly reward those with big deposits, and may leave someone who’s actually kept the mortgage being paid stymied.
- Average of the two. It occurred to me that an arbitrary, though not discriminatory system, would be to calculate both of the above then average it; it may end up with a fair mix.
Now, with all of these I would say what we’re talking about is division of the proceeds once the mortgage is cleared. However, you could also decide to use the same equation to divvy up the entire house proceeds, that would be much more harsh to the party which had put in less, potentially leaving one in debt after the sale – yet I’ve not done that in my calculations.
Now putting it into practice
Imagine there was a house, bought for £200,000 now worth £250,000, by brother and sister Phil and Jen. Jen put £40,000 into the initial deposit but didn’t earn as much so her total contributions to the mortgage were £5,000. Phil didn’t put anything into the initial deposit, but paid 2/3 mortgage repayments, that’s £10,000.
After interest, the remaining mortgage is £150,000, so ignoring fees for ease, there’d be £100,000 left from the sale.
Here’s the results
- Equal split
Jen gets her £45,000 back plus £22,500 from the split = £67,500 that’s a 50% return on her cash
Phil gets his £10,000 back plus £22,500 from the split = £32,500 that’s a 225% return on his cash
- Proportionate split
Jen gets her £45,000 back plus £36,800 from the split = £81,800 that’s a 82% return on her cash
Phil gets his £10,000 back plus £8,200 from the split = £18,200 that’s a 82% return on his cash
- Average of the two
Jen gets £74,650 that’s a 65% return on her cash
Phil gets £25,350 155% return on his cash
Frankly all three of these systems have pros and cons, and I do worry that by adding in the percentage return does tend to skew the results somewhat. Never mind beginning to factor in what if Phil has a bigger room and that’s why he was paying a higher percentage of the mortgage.
All of this stresses why it’s so important to make a legal agreement in advance (when all is still smelling of roses) to agree how things will be split. Yet if we assume people having done that, which of these systems do you think is the most fair – or do you have one of your own? Or know of a more formalised calculation?