I want to split two faces exactly where the vertices lay as seen below. How can I do this?
Select the 2 vertices you want to split and press v to Rip the edge. You'll have a result like that
(from the blender manual)
Rip creates a “hole” into a mesh by making a copy of selected vertices and edges, still linked to the neighbor non-selected vertices, so that the new edges are borders of the faces on one side, and the old ones, borders of the faces of the other side of the rip.