What happens to your mortgage when you split?
Separating from a partner or spouse is always painful. If you own joint property and have a mortgage, it can be even more complicated. Sorting out who will stay in the family home, who will pay the mortgage, and what will ultimately happen to the property can make a difficult time even more stressful.
In New Zealand, the presumption is that couples have equal right to the family home, whether they’re married or in a de facto relationship. Even if only one partner has their name on the deed, the house they live in is considered family property. Many couples manage to agree on division of property between themselves, while others need help from the family court or a mediator.
If you’re in the process of separating and need to divide property, here’s what you need to think about.
Practical pointers
A divorce or separation may be emotional, but it’s essential to remember practical issues as well. Whatever happens, do your best to keep mortgage payments going. If you don’t, you could incur late penalties from the bank and damage your credit rating. Even if one party moves out of the house, both are liable for missed payments, so do your best to come up with an agreement about who pays the mortgage – it can always be changed at a later date. Some banks will let you take a mortgage holiday for a month or two, which could give you time to sort out a separation agreement.
It’s important to think about your accounts, too. If you only have shared bank accounts, open a new one in your own name. You can choose to keep your shared account open to make paying the mortgage and other shared expenses easier, but it’s still a good idea to have a separate account that only you can access. It’s also smart to consult a lawyer – even if your separation is amicable, they can help write up any agreements and make sure they’re legal.
Buy, sell, or stay
When you separate, there are a few options for dividing your property and sorting out the mortgage. One partner can buy the other out, the property can be sold and proceeds split, or one partner may stay for a set period of time – for example, while the children are young.
Every option has upsides and downsides depending on your mortgage structure and financial situation. When you’re working on an agreement, it’s important to take a good look at your own finances to make sure you’ll be in a solid financial position after the split. Let’s look at the options in more detail.
Buying your partner out
Staying in the family home can give you a sense of stability at a difficult time. If you have children, they’ll be able to stay in a familiar home, keep going to the same school, and maintain a sense of normality.
If you want to keep the house, you’ll need to buy out your partner’s equity – that is, the value of the house, minus what’s owed on the mortgage. You may be able to refinance your mortgage for more than you currently owe, giving you access to the cash to pay your partner. In some cases, you may be able to pay off part of what you owe in other assets – they could get full ownership of vehicles and other high-value assets in exchange for their half of the property, for example.
If you do choose to buy your partner out, make sure to get a valuation and advice from a lawyer. The mortgage will need to be transferred into your name, making you solely responsible for payments. Go over your budget carefully to make sure you can afford mortgage payments on one income, and don’t forget other costs such as rates and maintenance.
Sell and split
Selling and splitting the profits is, in many ways, the simplest way to sort out property in a separation. Although it can be hard to leave a beloved home, it gives you a clean break and a fresh start.
If your mortgage is small and your property has increased in value over the years, you could end up in a good financial position, with a solid deposit in hand for your next property purchase.
However, selling can be a problem in some cases. If you have a large mortgage and your property has declined in value, you may not make much – if any – money from the sale. Remember that you’ll need to pay off the mortgage, pay costs associated with the sale, and then split profits down the middle. If you’re likely to end up with little to show for the sale, it may make more sense to keep the property for a bit longer. One partner could live in the house while paying the other ‘rent’ in the form of mortgage payments, or both could move out with the property rented to others.
Joint ownership
It sounds odd to own a house with an ex-partner, but it happens more often than you think. Some couples choose to hold onto a property because they’re unlikely to profit from a sale, while others agree to let one partner stay in the property for a set period of time. Often, one partner will agree to let the other stay in the property while children are at school. When one partner is staying, it’s essential to make a written agreement specifying who will pay the mortgage and when the property will be sold.
Making good decisions at a difficult time
Dividing property and sorting out the mortgage after a separation isn’t easy. It can be tempting to give in and let your ex-partner or spouse have their way, but that could leave you in a precarious financial position.
It’s essential to know your rights and get expert advice if you’re unsure. In fact, even if your breakup is amicable, it’s a good idea to consult a lawyer and financial advisor to make sure you’re making the best possible decisions for your future.
If you need help with your mortgage after a separation, talk to the Global Finance team. Call us on 09 255 5500