The sad reality is that many relationships don’t last. Around 30 per cent of first-time marriages in Australia end in divorce.
This makes for some difficult decisions if the ex-couple acquired assets together, such as a house.
De facto couples who enmesh their lives as if they are married and then later separate face similar issues which are largely recognised as such by the law.
This post looks specifically at the issue of mortgage payments on the property after a couple split up. This is a pressing issue for most couples who purchased property together, because, in the event of a break-up, one will usually stay in the purchased property, while the other will – at first, at least – need to find a rental property to move into.
The person who moves out will often wonder they should be still be paying both rent and mortgage repayments.
Unfortunately, if both names are on the mortgage documents, both parties must continue to pay the loan, even after they split. This is because the parties or ‘jointly and severally liable’ for the loan, meaning failure to pay could affect the credit rating of each party should the loan default.
The lender will also pursue both parties for repayment of the loan, whether or not one of them is no longer living in the property.
What are the options regarding the mortgage when a couple breaks up?
In recognition of the fact, one party to the former relationship simply can’t just stop paying the mortgage, both former partners need to discuss the options for dealing with the property.
Option 1: The party who moved out continues paying the mortgage. This is a wise option for the party moving out if they can maintain the expense because it will likely be looked on favourably by a court in the event of an eventual property settlement.
In situations where one partner remains in the house with the children from the relationship, arrangements can potentially be made between them so that the partner who leaves continue to pay the mortgage instead of paying child maintenance, for example.
Option 2: Transfer the mortgage. While this can be done, it can be a time-consuming process involving quite a lot of administrative work. In most cases the mortgage will need to be refinanced so that the person living at the property can take on the mortgage on their own and have their ex-partner’s name taken off the the loan and the title to the house. The lending bank will require proof that the person taking on the new loan can meet repayment on their own.
Option 3: One party buys the other out, again requiring the person who remains living in the property to prove eligibility for a new home loan on their own. A person can potentially finance and extend the mortgage to 95 per cent of the property’s value. In some cases, the person will increase the loan amount in order to pay out their ex-spouse on settlement of the property. If the person refinanced plans to continue living at the property, Capital Gains Tax (CGT) can be avoided. This is not the case if ownership is being transferred on an investment property.
Expert legal advice is essential for this option. Before proceeding, both parties need to agree on a valuation of the property that takes into account any increase in value and whether one party has made significantly greater contributions to the improvement or maintenance of the property.
Option 4: Sell the property. For many separating couples, this presents as perhaps the simplest option, particularly if you don’t have the time or patience for any of the options discussed above.
In this way you can both split the proceeds and move on with your lives. To achieve this aim both parties need to agree for the property to be sold, including its valuation and the division of the sale funds. These can often be sticking points.
One party may believe the property is worth much more than it really is. One party may think they deserve more of the sale proceeds because they paid more of the mortgage, or more for the renovation, or their parents provided more of the deposit.
If they can’t agree on all aspects of the sale, then a property settlement ordered by the court will be required. This involves a more extensive examination by the court about the contributions – both financial and non-financial – by each party to the property, as well as the length of the relationship, the age and health of each party, how much each party could earn in the future and which partner primarily cares for dependent children.
Seek expert legal advice
Big Law has years of experience advising people on family law matters arising after separation and divorce, including what to do about a jointly held mortgage.
The issues discussed in this post can be complicated, particularly around working out what a property is worth and how the proceeds of a sale should be divided up.
By discussing your situation with our expert professionals, we can help guide you on the right course at a time when you’re likely experiencing significant stress as a result of the separation.
Call us today for an initial consultation.