Breaking up a mortgage after the break-up: eChoice’s guide to home loans and divorce
Breaking up a mortgage after the break-up: eChoice’s guide to home loans and divorce
From mourning the end of a relationship to ironing out the living and parenting arrangements, divorce is difficult enough as it is. However, if you have a joint mortgage on a property together, it can add a whole new level of complexity.
Regardless of whether you both remain in the home, the mortgage still needs to be paid off and it’s not always as simple as splitting it 50/50. The good news is, by familiarising with the guidelines around home loans and divorce, you can make sure you’re prepared in the unfortunate event your marriage ends.
How is property split in a divorce?
There’s no one-size-fits-all solution when it comes to property split in a divorce – it depends on the individual circumstances of your family and home. Typically, in any relationship longer than 12 months, each party is entitled to a share of the assets. How the division of assets occurs depends on a number of factors such as:
- Whether or not there is another agreement in place, such a pre-nuptial
- The contributions made by each party – the deposit, stamp duty and legal fees
- Ownership contributions such as payment of the mortgage, home improvements, lumps sum payments – gifts and inheritance – as well as earnings
- The future earnings of each party
- Non-financial contributions in the relationship, such as staying home to raise children
- The number of dependent children
- The relationship length
This can apply to not only the property itself but also the home loan debt if you are encumbered by a mortgage.
Do I have to pay the mortgage after divorce?
In the event of a divorce, your mortgage repayments will still need to be made in one way or another. Failure to do so can lead to a compromised credit score, high-interest rates and eventually, the bank selling your home. However, this doesn’t necessarily mean you both need to pay half/half. There are various options that involve transferring the mortgage.
What happens to the mortgage when you divorce?
You may be wondering “can you hold a shared home loan account after divorce?” After all, surely paying the loan repayments back equally would be the simplest option. Yes, it is indeed possible to take out a joint mortgage and both remain liable for the debt until it is paid off. However, there are various reasons that this may not always be feasible. Perhaps one partner has a lower income, will have increased rental or childcare costs or simply doesn’t feel they should have to pay for a home they no longer live in. In this case, there are a few other divorce and mortgage options:
- Buying out the property share owned by your ex-partner
- Selling your property share to your ex-partner
- Selling the home and sharing the profits
Below, we’ll talk through these options in more detail
Can I transfer my mortgage to my ex-wife or husband?
Yes, you can transfer your share of the property to your ex-spouse. However, this means they would have to refinance the home to buy out your share and take your name off the home loan, as well as the property title.
If you go down this path, you will be eligible for the Capital Gains Tax rollover relief, meaning you won’t be required to pay CGT on the share you sold to your ex-partner. This is because they would be assumed to receive capital gain or loss in the event they sell the property in the future.
Can I buy my partner out of the mortgage?
On the flipside, you can also buy your partner out of the mortgage and remove them from the home loan. However, in order to do so, you would need to qualify for the mortgage on your own. If you’re eligible, you will be able to refinance and extend your mortgage to 95% of the property value.
You may also be able to increase your home loan to pay out a divorce settlement. In this situation, you may be required to pay Lenders Mortgage Insurance (LMI) if you loan more than 80% of the property value. However, the good news is, you generally won’t be liable for stamp duty, as it’s usually not payable on a transfer of equity.
Whether you’ll need to pay Capital Gains Tax will depend on how you use the property after the divorce. If you continue to live there, you’ll be exempt under the main residence exemption. If you move out of the property and rent it out but still keep it as your main place of residence, you may be exempt from paying CGT for up to six years under the temporary absence rule. However, the market value at that time will be the base by which CGT is calculated when you sell.
How to qualify for a home loan after divorce
In order to qualify for the mortgage on your own when buying your partner out, you must meet certain criteria, including:
- You must have a good repayment history on your current home loan
- You must be able able to prove you have the funds to pay out your partner if there’s inadequate equity in the property. However, unlike other loans, you don’t have to prove genuine savings
- Your partner must agree to sign a transfer form to you
How do I remove my partner from my mortgage?
Technically, you can remove your ex-spouse’s name from the property title yourself. However, this tends to be quite a complex and time-consuming process and the last thing you need in a divorce is more stress!
It’s best to seek the services of an experienced property lawyer or licensed conveyancer, who will understand the technical jargon and be able to quickly deal with any problems that arise.
Firstly, you will need to seek the consent of your home loan provider to take your ex-spouse’s name off the mortgage. With the help of the lawyer or conveyancer, you’ll then fill out a transfer title form. You can usually find this on the website of your applicable state or territory government department. You will need to provide the names of the people involved in the transfer, the Torrens Title details and the share of the property being transferred.
Can you take your name off a mortgage after divorce?
Yes, if your ex-partner can prove they are able to pay off the mortgage on their own after the divorce, they can take your name off the mortgage following the same steps above.
Refinancing your home after a divorce
Wondering how to refinance a home loan after divorce, exactly? Well, refinancing is simply replacing an existing debt obligation with another one under different terms. So, in the case of refinance after divorce, you would be putting the mortgage in one name.
If one of you decides to stay in the home, the other partner can put the profit from selling their share of the mortgage towards a new home loan.
Selling your home after a divorce
Another strategy is selling the home and keeping the assets. There are various benefits to this. It ensures that asset division is fair, reduces the emotional baggage and allows both parties to start afresh using the proceeds from the sale of the property. If you’ve owned the property for many years, then chances are you will also have a considerable deposit for the purchase of another property after the division of the proceeds.
However, if you and your ex-partner are not on amicable terms, this can be a difficult process. You have to collaborate on the sale of the property and agree on a real estate agent and price. You may even have to prepare the property for sale together. If you are not on good terms, you may also want to sell faster. This can lead to rushed selling the property for a reduced price, just so you can move on.
If you do choose to sell the property and divide the proceeds, then it’s important to seek legal advice. This ensures strategy ensures asset division is fair.
Can my partner stop paying the mortgage?
What happens if your partner is still on the home loan, but refuses to make their share of mortgage repayments? There are a few steps you can take in this event.
Firstly, you should contact your lender and inform them about the situation. While they will still require mortgage payments, you may find that they are willing to reach a compromise about the repayment schedule pending the division of your property in the Family Court.
You may also choose to sell the home. This ensures your mortgage will be paid and eliminates any potential negative consequences. The balance of the proceeds of the sale may be held in a trust until you and your ex-spouse meet a final agreement.
You may also be able to get a Court Order for spouse maintenance to ensure your ex-partner complies with the ongoing mortgage repayments.
Dealing with mortgages after divorce can get complicated and messy, and it’s not something you should have to go through on your own. eChoice’s experienced brokers could help you decide on the best course of action to reach a positive resolution. Contact us today for joint mortgage separation guidance on refinancing or selling.