Ask Annie: How is house equity divided when unmarried couples split?

Q: I would like to buy my ex-partner out of my house with the help of a friend, who I am hoping will be able to take over that share of the mortgage.

The house was bought for £264,000. My ex-partner paid a 10 per cent deposit, so our mortgage is £238,000. Given that the house has now been valued at £310,000, I presume I would have to give him his £26,000 back plus half of the equity made – £23,000.

If that £49,000 is paid for by my friend, and he can have his name put on the mortgage instead of my ex so the outstanding mortgage is still the same, how could it be worked out that my friend could not lose from the arrangement?

If we then went our separate ways, would my friend be entitled only to his £49,000 plus half of any equity above £310,000? How would his share be calculated?

LB Norwich

A: Normally when a marriage breaks up, it is assumed there will be a 50-50 split of the equity in the house, unless the requirements of the family call for an unequal division. With unmarried partners, the arrangement may be different and will often depend on how much each party has invested in the property.

The best way to safeguard both parties' interests when buying a property with an unrelated individual is to draw up a deed of trust setting out what will happen if ownership of the property changes. I presume you have not done this with your ex-partner.

I must point out that your estimate that all it will take to buy out your ex is £49,000 may be optimistic. Legally, he can expect to receive an increase in the value of his 10 per cent deposit equivalent to the rise in the value of the house since you bought it – in your case, a little below 20 per cent.

Presuming that you both contributed equally to payments and expenses such as repairs, you will then divide the remainder of the equity equally.

As for you and your friend protecting the value of your joint investment once your ex has been bought out, you are in the lap of the gods – or more precisely, moves in the housing market. Just like anyone who buys a property, you both risk losing money if house prices fall.

If you attempt to guarantee that your friend will not lose out, by inserting a clause to this effect in a newly drawn-up declaration of trust, you will put yourself at even greater risk of financial loss should property prices fall.

Miles Geffin, a solicitor at Mishcon de Reya, says: "It is not uncommon for a third party to take the place and stand in the shoes of one of the former joint owners.

"In an appreciating market, no one is disadvantaged by this," he continues. "The joint owner who is being bought out has their interest purchased for full value. The other original joint owner retains their – appreciating – asset and the new joint owner's investment is reflected in the value of the property."

Mr Geffin adds, though: "In a depreciating market, things are different. While the joint owner who is being bought out gets full value, the remaining original owner and the new owner will see their investment shrink in value. They will be left either having to cut their losses if they are forced to sell, or holding on in the hope the market improves."

One other thing to consider is the mortgage company, which will want to check the creditworthiness of your friend before agreeing to his taking on the mortgage debt. All should be fine if your friend has a good income and credit rating, but if not, he may be rejected and a new lender will have to be found.