How is a Mortgage managed after Separation?
There are a few ways a mortgage can be managed after separation, including paying off the mortgage in payments split between the couple, selling the property and dividing the profits, or one party buying out the other’s share.
When a relationship breaks down parties will generally undertake a property settlement. This is a process whereby the assets and liabilities of both individuals are divided among the parties in a fair and equitable manner. Loans (such as mortgages) are included in the total asset pool.
This means that for some couples with a mortgage, an agreement could be reached that sees the separated couple splitting their mortgage payments.
What is a property settlement?
A property settlement is the division of property between two parties after they have separated. The end result of this process should reflect a fair and equal division of property between the two individuals.
‘Property’ refers to both the assets and liabilities incurred by both parties in the relationship. It does not matter whether the property is in one party’s name or held jointly. The process of property settlement will allow for these titles to change in order to ensure that all property is divided equitably.
For a property settlement conducted by a Court, there are normally four main steps:
1. Considering the entire asset pool
This involves identifying all the assets and liabilities of both parties. Assets include houses, superannuation entitlements and other personal assets. Liabilities include loans or mortgages. How mortgages can be split will be further explained below.
2. Taking into account all the contributions of each individual to the relationship
The Court will then assess both the financial and non-financial contributions each individual brought to the relationship. Here each party’s income and their share of domestic duties performed in the household becomes relevant.
3. Considering the future needs of each party
This step involves considering which party may have primary care of any children. This will affect the financial needs of the parties in the future, particularly as one party may have more costs than the other.
4. The result of a fair and equitable split
As stated above, the aim of a property settlement is to have a fair and equitable split of assets. Hence, there is no assumption that ‘fair and equitable’ entails a 50/50 split of property.
Splitting mortgage payments: one way a Mortgage can be managed after separation
One option when splitting a mortgage between parties is for each party to pay an equal share of the mortgage until it is paid off. As long as payments are continuous, there should be no problems with the bank.
However, because partners can have a large income disparity and dissimilar costs, splitting mortgage payments may not be the best option. In this case, some other options that can be considered include:
One party paying out the other party’s share of the property so that the owner is now one party.
This means that the mortgage payments are now only made by one party. This can make payments less complicated as there is no need to split them and any decisions made regarding the mortgage or the property can be made by one party without the consent of the other.
The parties can agree to sell the property and then split the profits accordingly.
This option is worth considering if neither party are interested in keeping the property and are finding separate places to live. It also means that there is less debt for both parties.
Buying out the other party’s share of the property
Buying out the other party’s share of the property means that the individual will become the sole owner of the house and will be solely responsible for the mortgage repayments. For this option to be viable to a party, they will generally have to prove that they have:
- A good history of making repayments
- Have a sufficient income to make repayments (this will likely have to be proved to the relevant bank)
- Enough finance to buy someone out of a joint mortgage.
After a party’s ex partner agrees to being bought out, the ex partner has to sign a transfer form for the title of the property to be transferred.
This also means that the party will have to:
- Refinance the property with the bank
- Consider whether they need Lenders Mortgage Insurance (LMI). This is required if the loan amount is more than 80% of the total value of the property.
In conclusion, managing a mortgage after separation can be a challenging process for anyone. However, it is important to understand the legal obligations and rights under Australian family law. Seeking the guidance of a family law professional can help you navigate the process and make informed decisions. Remember to consider all options, including refinancing, selling the property, or splitting mortgage payments. If working together is a viable option, it is possible to manage your mortgage and move forward with a new chapter in your life.
If you need any assistance regarding your divorce and property settlement please feel free to reach us via the contact form below.
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