Living together unequal contribution of own money when buying a house

Living together unequal contribution of own money when buying a house

Are you planning to contribute more money to the purchase than your partner? Then it is advisable to properly record this division to avoid unpleasant discussions about intentions afterwards. Suppose you intend to buy a house together with your partner and you have a savings account of €100,000 which you wish to contribute, but your partner does not contribute any savings.

Living together unequal contribution of own money

In this case, one partner brings in more than the other. In most cases, you buy the property together for half each. When selling the property, both partners are then entitled to half of the total value of the house minus the mortgage. Despite the fact that one partner paid more at the time of purchase than the other.

It can also happen that you start living together in the house that already belongs to your partner. Even if you then contribute to the repayment of the mortgage, it is wise to record this well and manage expectations about it. Will you share in the value development of the property, both positive and negative, or do you wish to receive the amount of repayment in nominal terms in the event of an unexpected relationship break-up?

 

Contribution in kind

Even if you contribute capital in a way other than money, it is wise to make agreements about this. Consider the following example situation. Iris and Tijs buy a house together for the first time that needs refurbishing. Tijs’ father is a builder and, for this reason, can do much of the renovation work on his own without compensation. Iris has savings she wants to contribute. Together, they come to the conclusion that the hours that Tijs’s father will work match the cost of the building materials quite nicely.

An agreement they can make together is that there will be no reciprocal compensation because both parties will contribute equal capital. Tijs in kind, and Iris in cash. Even if there is an unequal contribution in cash and in kind, different agreements can be made about this.

Especially in situations where there is a contribution in kind, we recommend having a good discussion about this and recording the agreements made. This is because administration is much more complicated due to a lack of substantiation in the form of proof of payment et cetera. Precisely because this has not been properly agreed upon, a lot of hassle can arise in the event of a relationship break-up if these things have not been specifically calculated or agreed upon.

 

Various forms of contribution of assets

The most common forms of contribution of capital by cohabitants are as follows:

  • surplus value of an owner-occupied house owned by only 1 of the partners
  • contribution of gifts from relatives such as parents because of the jubilee bonus
  • savings of one partner
  • contribution in kind by help from family when renovating
  • purchase costs when buying a house paid by one partner only

Agreement or promissory note

In such a situation, if you do not have anything recorded at the notary and break up – for whatever reason – unpleasant situations can arise. The partner with the most contributed own money may then lose half of the more contributed money. This situation can be avoided by making arrangements in writing. This can also be arranged in a cohabitation agreement or by means of a settlement agreement. In the event of a sale of the property, you then mutually agree that half of your own money contributed will be paid by your partner.

As an example, let’s take the situation where John and Anne buy a house worth €400,000 and where Anne contributes €100,000 from an inheritance and the remainder of €300,000 is borrowed from the bank. Suppose John and Anne break up in five years and the house has increased in value by €100,000 then Anne gets her €100,000 back and the profit of €100,000 is shared between them on a fifty-fifty basis.

The moment the value has actually fallen by €50,000 then a debt of €25,000 arises for John. After all, first the mortgage with the bank is repaid of €300,000 because it comes first, then Anne receives €50,000 of the residual proceeds and then the loss of €50,000 is shared between John and Anne, with John getting a debt to Anne of €25,000.

Agreements on the repayment of this debt and the amount of any interest payment on this debt are also better recorded in advance with the notary. This way, you can concretely describe all occurring situations to avoid unpleasant discussions. You can specify in the deed of delivery or cohabitation agreement when the debt is due, what the consequences are if the agreements are not met and so on. What is also important is to agree when the contribution expires. If you do not make arrangements as unmarried cohabitants, the contribution will automatically lapse after 5 years, unless you make other arrangements.

This is a basic rule and there have been several rulings by judges in case law, but if you are involved in a discussion on this subject, you are therefore dependent on the opinion of the judge. It is better to avoid this dependency and make proper agreements yourself about your joint expectations on the contribution of assets. Preventing prescription of the contributed capital can also be arranged this way.

For example, read here a ruling about former cohabitants where one of the partners invested €244,124 from their own money for a renovation, and lost this money due to prescription. So, this part too is financially important to consider.

 

Alternative to promissory note

A promissory note is a way to settle unequal contributions between them. However, it does not always feel right to assign debt to the partner in this way. There is therefore also a good alternative to the promissory note, namely the cohabitation contract or the settlement agreement These contracts can include how the contribution to the jointly occupied home will be handled. In them, both parties can specify how they would like it to be arranged. We continue with the example of John and Anne.

John and Anne decide that a promissory note does not suit the way they want to set up the financing for their home. John is not comfortable with the idea that Annehas a claim against him that could be due at any time, subject to conditions. They therefore decide to explore the alternative, the cohabitation agreement.

Am I obliged to have a cohabitation agreement drawn up?

Transaction costs of buying and selling a property
John also notes that costs are incurred in the purchase and possible sale of the home, and he would not consider it right for him to pay for these costs when Joke can immediately claim her contributed €100,000.

They therefore agree in the cohabitation contract that if the house is sold with proceeds of at least the sale price, an amount of €80,000 will first accrue to Anne. Hereby they reserve €20,000 as purchase and sale costs. Any remainder will accrue to John and Anne on a fifty-fifty basis. They also agree that if the realised sales price at the time of sale is lower than the purchase price, half of this loss will be deducted from the €80,000 that would accrue to Anne.

Suppose the house purchased for €400,000 is sold after five years for €350,000. The bank receives €300,000 from John and Anne. It is then agreed that Anne will get back a maximum of €80,000 of her contributed €100,000, and half of the loss will be deducted from this €80,000. The sale loss amounts to €50,000. Joke gets €80,000 – €25,000 = €55,000 after the sale. On balance, John retains a debt to Anne of €5,000.

Settlement agreement

You can also draw up a settlement agreement in which you agree together on the contribution of your own money. In the previous paragraphs, we have always talked about a one-off deposit. However, you may also have to make monthly ‘investments’. Consider the periodic mortgage repayments. Do you wish to set these off at the end of your relationship or not?

In a standard cohabitation agreement, the interest on the mortgage is included as household expenses. And therefore not to be set off upon relationship breakdown. While the periodic repayment of the mortgage is not counted as a standard household expense. This could therefore mean in case of a relationship break-up, a discussion on this. Make sure the arrangements in a settlement agreement are aligned with the arrangements in the cohabitation agreement. The latter document is best drawn up by a notary.

For this situation, it is better to also lay down expectations of your relationship prior to the purchase. This situation often occurs in couples with unequal incomes, for example after having children, where one partner contributes more compared to the other.

Different ownership ratio

In practice, you can also opt for a different ownership ratio. Only the Inland Revenue will then also be around the corner if the ownership ratio is more skewed than 60/40. Suppose you wish to take over your ex-partner’s share when the relationship breaks up, then transfer tax of 2% may be due. So this is not the case if the ownership ratio is fifty-fifty.

 

Becoming co-owner of the property

The moment you decide to live together in the other’s owner-occupied home, the other partner can buy in. Then, as it were, a share of the home is transferred in ownership and 2% transfer tax is payable on it.

This share can also be financed with a mortgage. Then both of you are on the mortgage deed. Also in such a situation, it is then advisable to make agreements on the (over)value.

Influence of parents

The contribution of own money may also have originated from a gift from the parents. This contribution is also covered by the above-mentioned rules. Especially since the parents may wish to use this money in a certain way, the following considerations need to be made for them:

  • What should happen in case of death? To whom do I wish to bequeath the money?
  • Who may benefit from the interest donations?
  • How do I wish to deal with an endowment in the event of a relationship breakdown?
  • Do I wish to provide the gift under an exclusion clause?

‘Verblijvingsbeding’

It may also be wise to include a so-called ‘verblijvingsbeding’ in the deed of conveyance or cohabitation agreement. This way, you do not necessarily need to have a will drawn up. With a survivorship clause, you can ensure that joint property is transferred to the remaining partner after an early death.

This residence clause prevents you from having to deal with your deceased partner’s heirs. Suppose you have bought a house together, the residence clause ensures that you can continue to live in the house and you will not be forced to leave the house.

However, you should be able to pay and take over the mortgage. You can take out mortality insurance for that so that part of the mortgage can be repaid in case of an early death.

You can include the residence clause in two variants. In one variant, you agree that the (surplus) value of the property will be allocated to the legal heirs. In the other variant, you agree on a ‘free of charge’ residence clause whereby the remaining partner receives the (surplus) value so that there is no settlement with the legal heirs (family).

Taking the break-up of a relationship along with mortgage interest

Suppose you are unexpectedly confronted with a relationship break-up and the mortgage interest is at a low and therefore favourable rate? Who is then allowed to take this interest with you? If you have not agreed on this, you still need to make arrangements. You can avoid this by already making arrangements about this in the cohabitation agreement. This is because most lenders do not allow you both to take half of the favourable mortgage interest. Thus, a choice needs to be made in most situations.

Summary

This article assumes an initial deposit when purchasing a home. However, during the relationship, additional mortgage repayments or investments for a renovation may possibly take place. Even then, we recommend accounting for these contributions in the same way. Drawing up a settlement agreement is the simplest variant in this respect.

Tell us your story

If you would like financial advice on this specific subject or on taking out a mortgage, feel free to present your case to us. We can properly guide you through these potentially sensitive topics.

 

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