When a couple decides to end their relationship and separate, they are faced with a lot of decisions. If the couple have children, they need to figure out how they will parent moving forward. The couple also needs to decide how they will divide their assets, which may include a family home. If they have taken out a home loan together, they may need to decide what will happen to their mortgage after separation.
There are some common misunderstandings when it comes to what happens to a mortgage after a separation, including who has to pay the mortgage after separation and the options you have to manage the mortgage moving forward.
Whether you’ve recently separated and you’re faced with this issue now or you’re considering taking out a mortgage with your partner now, it’s important that you understand your responsibilities and rights when it comes to breaking up and mortgages, so keep reading.
Who has to pay the mortgage when you separate or get divorce?
If you co-own a property with your ex-spouse and are co-borrowers on the mortgage, then you are both responsible for ensuring that the mortgage payments are made.
It doesn’t matter why your relationship ended or if one of you is living in the home, if both of your names are on the mortgage contract, then you’re both responsible for it. So, even if you’ve moved out of the family home and need to pay for new living arrangements, if your name remains on the mortgage, then you also need to ensure that the mortgage is also being paid.
As you can imagine, this can put a lot of financial pressure on people, which is why it’s important to know your options. Before we discuss what you can do with your home loan, let’s first talk about property settlement.
What is a property settlement?
A property settlement is essentially the division of property between a married or de facto couple when they separate. The property, which includes things such as real estate, vehicles, money, superannuation and even pets, owned by each person, whether jointly or individually, is considered to be part of the matrimonial asset pool. When a couple separates, they need to decide how this property will be divided between them.
How are assets divided in a property settlement?
The way in which property is divided between the former partners is dependent on a variety of different factors and no two property settlements will be the same. It’s not as simple as a 50/50 split – though, for some couples they may decide to do this.
The factors that can influence who gets what in a separation include:
- How long the relationship was;
- The financial contributions of each person;
- The non-financial contributions of each person;
- Incomes and earning capabilities;
- The number of dependent children and parenting arrangements; and
- Existing agreements, such as prenuptial agreements or binding financial agreements.
A couple can decide on their property settlement privately between them and have an informal agreement, they can also make their private agreement formal and legally binding by applying for a consent order for their property matter, they can work with family lawyers to help them negotiate an agreement, or they can let the court decide how their assets should be split.
A lot of factors will impact the way in which you divide your assets. For example, if one person will have the children more often than the other, they may have their ability to work as much as the other parent impacted, which could result in a larger share of the assets.
Deciding what will happen to the family home, whether there is still an active mortgage or not, can be one of the more contentious issues in a property settlement matter.
What options do you have if you have a mortgage when you separate?
If you’ve separated and you have a mortgage that is in both people’s names, there are a number of different options available to you:
- Continue to pay mortgage together
- You buy them out of the mortgage
- Your former partner buys you out of the mortgage
- Alternative arrangements
- Sell the home
We’ll explain each of these options in more detail below, but it’s important to note that there is no right or wrong answer. The best option for you will be dependent on your unique circumstances – which is why it’s a good idea to seek legal advice to understand your rights and responsibilities.
Continue to pay the mortgage together
This option is a somewhat less common approach, but it is one that can work for couples who have split amicably and have a good relationship. Both parties will continue to pay the mortgage and retain ownership of the property. The property could be an investment asset with the parties dividing the income that is generated from it.
Doing this does come with some risk and potential financial stress. Usually in this kind of arrangement, neither party will live in the home, which may mean that you will need to be able to not only maintain the monthly loan repayments on the property but also sustain separate housing expenses. It also means that you’re dependent on your former partner holding up their end of the deal. If they don’t pay their share of the mortgage, you’re still responsible for it, so this kind of arrangement requires a lot of trust.
You can buy them out
If your former partner is willing to part with their share of the property you may be able to buy them out. However, to do this, you will need to refinance your home loan (apply for a new mortgage). You need to be able to prove to your lender that you’re able to make the home loan payments yourself. This will be dependent on your income, outgoings, monthly living expenses and other loans that you may have.
While this option allows you to retain ownership of the property and have your life a less disrupted, if you’re unable to service the new loan or even qualify for it, this option won’t work for you. There are also usually additional fees to consider on top of a new home loan.
It also requires your former partner to agree to this and sign a transfer form confirming that they do agree with this decision.
Sell your share
If your former spouse is able to qualify for new a home loan and cover the cost of the mortgage payments, then you can sell your share to them. They will be required to prove that they can service a new home loan – just as above – and you will be required to sign a transfer form confirming your agreement to this arrangement.
You may come up with a variety of different agreements to manage your mortgage moving forward. For example, if one party will have the children living with them majority of the time, they may wish to stay in the family home, to reduce the disruption the children may experience. They may not be able to cover the mortgage themselves, so you may come to an agreement where both of you pay the mortgage. This could mean that the person living in the home pays more of a share of the mortgage or you may pay evenly – however, the person not living in the family home will likely have other living arrangements they need to pay for too. This kind of arrangement isn’t overly common; however, it could work for you.
Sell the house and share the profit
One of the most common outcomes for couples who split with a mortgage is that they decide to sell the jointly owned property and split the profits. This is common because often neither spouse can afford to meet the loan repayments on the family property alone. This allows both parties to be released of the responsibility of the mortgage and if the property has been owned for a long time, it could see them making a good amount of money due to the considerable equity in the property (though that’s not always the case).
It is important to note that there may be various fees associated with this option.
What if you can’t agree on any of the above options?
Seeking legal advice is crucial when you separate, especially when you do so with a mortgage and property. You need to understand the options available to you and the potential consequences of each option, so you can make an informed decision, because a decision does need to be made.
If you find yourself in a circumstance where you want to sell the property but your former spouse does not, unless they can prove that they can manage the mortgage repayments of a newly refinanced loan themselves, they may not have any other choice than to go forward with the sale of the property.
You can apply to the Federal Circuit and Family Court of Australia to enforce an order for the sale of the property. If this occurs, the house will be independently valued, and the court will appoint a real estate agent to sell the house for that value.
The court is likely to order the sale of a property if there is no other way for a just and equitable property settlement, and as long as selling the house doesn’t affect the ability of either party to earn an income or the party trying to keep the home isn’t able to prove that they can refinance the mortgage by themselves.
By working with an experienced property settlement lawyer, they can help you find the right option for your circumstances.
What happens if you don’t pay the mortgage?
Your lender doesn’t care who pays for what when it comes to mortgage repayments – as long as it’s being paid. If either party stops paying it can have dire consequences on both parties if the overall mortgage repayments are not made. Your credit rating could be affected which could them impact future loan applications and lead to you being seen as a risk in the eyes of lending institutions. You may be able to secure loans in the future, however, with higher interest rates. The most serious risk is that your home loan could be foreclosed on, and your property is sold.
If you’re unable to pay your mortgage payments in full, you should contact your mortgage broker and advise them of your situation. Many lenders have hardship teams who can work with you to reduce your payment amount for a period of time or even temporarily pause your repayments. However, if they are unaware of your situation this won’t just happen.
If I separate from my partner, what should I do?
Whether you’re considering a separation or you’re already separated, and you have a mortgage, the first thing you should do is advise your lender of your circumstances. Secondly, you should seek legal advice.
You may be affected by a number of different family law matters, including parenting and property matters. These can be extremely complex in nature and overwhelming to manage.
At Unified Lawyers, we offer a team of family lawyers and conveyancing specialists, who can help you resolve your family and property law matters. We can help you understand your rights, responsibilities and help you to achieve the best outcome for you.
Discuss your matter with us today by calling us on 1300 667 461 or booking a consultation using the button below. We help people all over Australia manage the challenges of separation and divorce every day.