Think about who will keep the house should you split up
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Love might be in the air this Valentine's Day, but couples thinking of moving in together, buying a property, or getting married should read up on their financial rights and responsibilities first. Unfortunately, many couples buying a house together don't discuss what they would do if their relationship didn't last. A third of first-time buyers contributing unequal amounts to a property purchase with a partner don't have a legal agreement in place to protect their money, according to research by law firm Simpson Millar. One in five gave their reason for this as a fear of "damaging trust" with partners, parents or friends.
Think about how to divide ownership
Unmarried couples buying a property together can ring-fence their contribution by owning it as "tenants in common", rather than as "joint tenants". Owning a property as joint tenants gives both partners equal rights over the property, with each person owning 100% of the property. If one partner dies, ownership of property automatically passes to the other owner, and the share of the property can't be passed onto a third party in a will while the other owner is alive. In the event of a break-up, either party could apply to court for an order for the house to be sold and the proceeds divided equally.
Tenants-in-common own property in a different way, with each person owning a fixed stake in the property. This may be equal (50:50) or unequal (for example, 70:30). A legal document called a "declaration of trust" can be used to indicate the proportion of the property owned by each partner and how the property's value would be divided should they part ways. Buying as tenants-in-common is often the preferred option when one partner contributes more than the other, or if one set of parents is helping with the deposit.
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However, couples who own a property as tenants-in-common should be aware of the implications should either partner die. The deceased person's share of the property wouldn't automatically pass to the other person, but would be passed on according to wishes laid out in their will, or according to intestacy rules if a will wasn't in place. "If you want to hold the property as tenants-in-common but you still want the surviving owner to inherit your interest in the property on your death, you need to make provision for this in the terms of your will," says Stuart Durrant of Gardner Leader Solicitors.
The situation is completely different for married couples or those in a civil partnership. Under matrimonial law, the "matrimonial home" where the couple live is normally treated as a marital asset. This applies even if it was brought into the marriage by one spouse, or only has one partner's name on the title deeds. During a divorce, all marital assets are identified and valued as part of the process of working out what there is to divide up. There's no set formula as to how assets are divided, but the starting point is normally a 50:50 split.
"If one person owns a property prior to marriage then the non-owner still has a claim to the property even if the marriage doesn't last," says Durrant. "Under matrimonial law the assets of both parties to the marriage can be taken into account and redistributed irrespective of legal ownership."
That said, there are some exceptions to this rule. One of these applies if the marriage is classified as a "short marriage", which normally means five years or less. With a short marriage, assets acquired before the marriage may be treated differently to assets built up during the course of the marriage.
"The longer the marriage, the more likely the property will be shared irrespective of the deeds. In the case of short marriages this can be overruled if children are concerned, but it could be the case that the main care giver requires the home for the children," says Fiona Lazenby of Knights Professional Services. "The court looks at the fair outcome, and has discretion as to how it will determine the outcome. Factors it will look at include the length of marriage, financial resources of each spouse, and the housing needs of children."
Some couples write a pre-nuptial agreement before they get married but, although a court might take this into account in the event of a divorce, pre-nuptial agreements are not legally binding in England. In any case, not all divorcing couples have the divisions of their assets decided in court many reach an agreement through mediation or by their respective solicitors negotiating for them. If things are fairly straightforward, the options regarding property are normally for one spouse to buy the other out, or for the property to be sold and the proceeds divided.
How to handle the mortgage
If a couple with a joint mortgage split up and one wants to take on sole responsibility, the mortgage will need to be transferred from a joint mortgage to a sole-name mortgage. This process is known as a "transfer of equity". "The lender will assess the new sole owner to establish whether they can afford the mortgage on their income alone," explains Pete Mugleston of onlineMortgageAdvisor.co.uk.
"The lender is under no obligation to remove the other partner from the mortgage deed unless the borrower can pass this test. This can cause problems if the departing partner is keen to move on and buy another property." In many cases, the new sole owner will need to borrow more money to buy out the ex-partner's share of the property. But again, he or she will need to meet the lender's borrowing criteria to have the new, larger mortgage in one name alone.
If your mortgage lender doesn't agree to the transfer of equity, it may be possible to remortgage to a new lender. "A mortgage broker will be able to advise on suitable lenders for your new circumstances. For example, some lenders will take child maintenance payments into account when assessing a mortgage application," says Mugleston.
However, many people find it too expensive to buy their ex-partner out, as rising house prices often mean they owe their former spouse a large sum of money. If this is the case, the best course of action may be to sell the property and split the proceeds. Ideally, this would happen as soon as possible, enabling both parties to move on, but if children are involved one parent might want to stay in the family home to maintain as much continuity as possible.
When this is the case, the other partner may agree to defer receiving the balance until the property is sold when the children reach a set age. This is commonly known as a "Mesher order". The downside is that both names remain on the mortgage, which may make it difficult for the partner who's moved out to get a mortgage for another property. Regardless of who lives where after separation, if you have a joint mortgage, you're both responsible for paying the mortgage, so both of your credit scores will be affected if you fall behind on repayments.
The myth of common-law marriage
Unmarried people moving into a house owned solely in their partner'sname should be aware they have few rights should the relationshipend. In England, the concept of "common law" husband or wife doesn'texist."No matter how long you may have lived with your partner, thereare no automatic rights to claims over your partner's assets, incomeor pensions," explains Fiona Lazenby. "In the absence of a clear legalframework for cohabiting couples, you should seek advice. A livingtogether agreement', properly prepared, can allow you to set out howyour family finances will be structured, and common intentions aboutproperty shares, and help to avoid problems in the future."
In the event of a break-up, in some cases the non-owner may be ableto prove they have a "beneficial interest" in the property. This is wherea person has either made a direct financial contribution towards theproperty such as paying the mortgage or for renovations or there wasa clear understanding that they would be entitled to a share of its value.But should the sole owner die, the non-owner still wouldn't have any rightto inherit the property unless this was set out in the owner's will.
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Emma Lunn is a multi-award-winning journalist who specialises in personal finance and consumer issues. With more than 18 years’ experience in personal finance, Emma has covered topics including mortgages, first-time buyers, leasehold, banking, debt, budgeting, broadband, energy, pensions and investments. Emma’s one of the most prolific freelance personal finance journalists with a back catalogue of work in newspapers such as The Guardian, The Independent, The Daily Telegraph, the Mail on Sunday and the Mirror. As a freelancer she has also completed various in-house contracts at The Guardian, The Independent, Mortgage Solutions, Orange and Moneywise.
She also writes regularly for specialist magazines and websites such as Property Hub, Mortgage Strategy and YourMoney.com. She’s particularly proud of her work writing about the leasehold sector and a Guardian front-page story about a dodgy landlord. She has a real passion for helping people learn about money – especially when many people are struggling to get by in today’s challenging economic climate – and prides herself on simplifying complex subjects.
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