In most cases, couples purchasing a home do so together and share legal and financial responsibility for the mortgage. But when the relationship breaks down, both parties remain liable for the repayments until legal or financial arrangements are finalised.
In the meantime, there will likely be additional expenses that pop up. As Brisbane Family Law Centre director, creator, and divorce lawyer Clarissa Rayward told Your Mortgage, couples going through a separation often see their living costs double as one household becomes two, while legal expenses and other professional fees can add to the strain.
So what are your financial options during and after divorce? Here’s what to know about managing a mortgage amid a separation – from meeting repayments in the short term, to removing your ex from the loan or deciding whether to sell the house.
What happens to a mortgage in the early stages of a separation?
Even if you agree to separate or move out from the family home, if both names are on the mortgage, both parties are equally responsible for repayments. Until a legal property settlement is reached – typically with the help of the Family Court or mediation – lenders still expect the mortgage to be repaid as usual.
“Separated families need to find a way to meet those mortgage repayments,” Ms Rayward said.
If they don’t, they could default on their home loan and face a nasty credit rating hit.
“The practical challenge we see with this is, often when people separate … they’re living in two homes, which increases the family’s costs, making it sometimes really hard to meet mortgage repayments, particularly in the current environment.”
In such situations, two paths need to be carved: one to provide a short-term fix and another for a long-term solution.
“The short term might be trying to make arrangements with the financier to perhaps move repayments from principal and interest to interest only to reduce cash flow burden, or a scenario in which the person living in the house might meet the majority of the mortgage and the other person might contribute a component,” Ms Rayward continued.
“Try to work together. Get a plan, be clear on what resources are being used for different things, and really try to manage that is the best general advice I would give to couples navigating a separation or divorce while managing a mortgage together.”
Who keeps the mortgage after divorce? Here’s what happens next
But what happens to a mortgage in the long-term after a divorce or separation? When a separation progresses, two processes come into play regarding the home and mortgage: the Family Court or otherwise legal process and a lender’s process.
1. Family law and property settlements
The legal process can determine how assets (including the family home) are split. But according to Ms Rayward, the court doesn’t assess mortgage affordability in the same way a lender would.
“If someone is hoping to retain a property … they might need to make a cash payment to the other person.
“The court is likely to say, ‘we’ll give you a period of time to achieve [that] and, assuming you do, you can keep the house with the mortgage’,” she explained.
2. Lender approval and refinancing
To officially remove one person from a joint mortgage in the eyes of a lender, refinancing is typically required. When applying for a home loan to refinance to, the person keeping the home will likely need to prove they can service the loan independently.
That might be difficult – especially if the mortgage was approved based on two incomes or if equity needs to be accessed to buy out the other party.
“What we would say to a client is, it’s really important to get information on their options and their financing capacity, so that when they’re thinking about their outcome in their property settlement, they’re setting themselves up for something that is achievable,” Ms Rayward said.
“I’ve seen families come up with really creative solutions to try to keep a property. There’re lots of different avenues they can take if that’s their goal and if they’re working together.”
When is it better to sell the house?
However, if both parties aren’t willing or able to work together, the property will likely have to be sold.
Further, if neither party can service the mortgage on their own, particularly after paying the other party out of their ownership share, it might make sense to sell the property.
The proceeds of the sale can then be used to repay what’s left of the mortgage and the excess split between both parties in an agreed-upon manner.
Selling may feel like a loss, but it’s usually preferable to falling into mortgage stress and risk missing repayments, which could damage your financial future.
Offsets & redraws: Other mortgage considerations in separations or divorces
If you and your ex own a property together with a mortgage, money in offset accounts or accessible via redraw facilities may be considered joint property. Thus, you should both take the time to consider what might happen to it in the immediate and long-term future.
It’s normal to feel strapped for cash in the aftermath of a separation, according to Ms Rayward. With that in mind, she notes it can be very important to specify which resources are to be used for different expenses and which are to remain untouched.
“If there are linked redraw or offset accounts, one of the options some families will reach is to use those funds to keep things moving financially.
“Other families will put arrangements in place so neither of them can use funds that are in, say, offsets, without joint consent.
“That’s important as it’s not ideal if someone takes those available resources at the time of separation – it really can restrict the other person’s options.”
My ex will stay in the house. Can I remain on the title and mortgage?
Your home is a large financial and emotional investment. It can, therefore, be hard to walk away from a property in the wake of a divorce or separation.
If your relationship with your ex sees you comfortable to retain ownership of a property acquired jointly, you might be tempted to do so. Particularly, if neither of you could qualify for the mortgage as individuals. However, this could put you at serious financial risk.
When two people are on a mortgage, it’s both their responsibilities to make sure the repayments are being met. That’s the case even if one party is living at the property and has agreed to pay their mortgage by themselves.
So, if your ex is living in the property and you’re not contributing to the repayments, you could find yourself on the hook if they stop paying. Further, your credit score will likely take a hit if they fail to make a repayment.
“One you’re both on a mortgage, you’re both liable,” Ms Rayward said.
“The risks, as I see it, primarily relate to defaults and credit ratings and those sorts of consequences.
“But there’s a huge stress element for families when mortgages aren’t being paid, if you don’t have control over that and you’re not living in the house, the human impact is significant.”
What if the mortgage and house is only in one person’s name?
If only one person is on the title and mortgage, the legal ownership and liability are clearer – but it doesn’t necessarily mean the home won’t be split in a property settlement.
The Family Court may consider the non-owner’s financial or non-financial contributions to the family when dividing assets. It’s best to seek legal advice during the process of separation.
See also: Can you apply for a home loan without your spouse?
FAQs: Managing a mortgage during divorce or separation
Can you pause or defer mortgage payments during a separation?
Many lenders offer hardship assistance. Contact your bank as soon as possible if you’re struggling to make repayments.
If you feel in over your head, you can reach out to the National Debt Helpline for free advice by calling 1800 007 007.
What if you’re in negative equity (the loan is worth more than the home)?
In cases of negative equity, you may need to sell at a loss and split the debt. Independent financial advice is crucial in such instances.
Can a lender reject a refinancing application after divorce?
The person hoping to take over the loan will likely need to meet all income and serviceability requirements. If they can’t they may not be approved for a new home loan and could be forced to sell the property.
Disclaimer: This article contains general information only and does not constitute legal or financial advice. Readers should consult with a qualified legal or financial professional for advice specific to their situation.
Image by Jackson Simmer on Unsplash