Listen: Buy out or sell? Mortgages and separation

Kate Russell

With interest rates on the rise, borrowing to purchase property could get tricker. So, where does this put you if you’re going through a separation? Welcome to The Separation Guide podcast. I’m Kate Russell, and in this episode, I’ll be learning about mortgages and separation.

75% of the couples who take our Q&A jointly own their family home. So, what happens if you have a home loan when you separate? What if one of you wants to keep your property? How does refinancing work? Or what if you sell and both start again – what does borrowing look like as an individual rather than a couple?

My guest today is Jyana Papanastasiou, who’s had an extensive career in finance and lending, working in the industry since 2007. Her career began with varied roles in the retail banking sector, and in 2015 she joined the Finance Division of the SCM Group as a Senior Lending Specialist. She’s industry qualified in Finance and Mortgage Broking and she’s been helping out some of the couples who’ve completed our Q&A with their finances. She is very much dedicated to helping people better understand their borrowing capacity and navigate their financing options post- separation.

I started by asking Jyana about having an existing home loan, and who’s responsible for paying when you separate.

Jyana Papanastasiou

That’s a really good place to start, Kate. So usually when a couple separates, we may have one party moving out and one party staying and continuing to reside in the home with or without children. And I guess this then raises the issue of who is responsible for paying the home loan or the mortgage, to your point.

So let’s talk about this point from the mortgagors or the banks perspective.

If both of you are registered proprietors of the property or joint owners of the property, then it’s likely that both of you are also joint account holders or co-borrowers of that home loan as well. In that situation, the bank or the lender would expect the home loan to be paid. So the obligations to continue to be met on that loan, whether both or either of you are living there or whether both or either of you are choosing to actually make those repayments.

Kate Russell

So effectively, you’ve got that contract with the bank or the lender, not with your partner?

Jyana Papanastasiou

Exactly right. So in that situation, you’re absolutely right. The loan contract, your loan agreement is held with jointly and severally, by you and your partner or ex-partner and the lender. And in that situation, you’re not using your liable for the whole loan amount and not just part of the loan amount. So from the lenders expectations and from where they sit, the home loan needs to be repaid.

Kate Russell

What could happen if you don’t pay your loan?

Jyana Papanastasiou

So there are several ramifications to that. And if the loan is not being repaid, the situation could escalate with the lender in that they could issue a notice to commence the process of repossession or selling the home from under you. Okay. And that’s a situation that, of course, is the extreme situation and the end result of not making loan repayments over a period of time. But essentially, that’s where that could lead. Now, the fact that obviously we’re dealing with a family home here and it’s the place and the roof over our head that we lived in and continue to perhaps live in and raise our children in, that’s really important to us. But when it comes to the lender’s perspective, that’s not a consideration when it comes to the amount of debt that you owe on that property.

Kate Russell

Right. So contributing to that mortgage continually when you’re going through that separation is really something that you need to put first and foremost.

Jyana Papanastasiou

Yeah, super important. And obviously, everyone’s individual circumstances do vary and are different. And as such, we have seen a range of other scenarios and arrangements that are being made or put in place by separating couples to ensure that this obligation is met and that property expenses have also continued to be met as well until there’s either the loan is refinanced or the property is sold, if that’s where the financial settlement lands.

Kate Russell

Other than the lender potentially selling the home or foreclosing on the loan? What are some other effects of not paying?

Jyana Papanastasiou

There probably are two other main considerations or effects of not repaying the home loan and having loan arrears. One of those is actually the effect that it could have on your credit rating. So this could affect not just one of the borrowers, but the co-borrower as well. So both potential parties could have their credit rating affected because of the ongoing arrears position on a home loan. And if a credit rating is affected and credit score starts to decline, this could potentially affect any future loan applications that are made, be it to either refinance this loan that’s already in place or any future lending prospects as well. So that’s one really important consideration.

And the second is a flow on from that and the ability to, I guess, raise a loan in the future or in the near future, particularly for the party that’s choosing to refinance the loan and retain the family home. If there are ongoing arrears on a home loan, it would affect the risk grade of that particular borrower and situation and loan application, which could result in a number of outcomes, the most severe being obviously a loan application decline. And that’s something that we wouldn’t want to see, particularly if you’re looking to retain the family home.

It could also mean if a lender is prepared to take on impaired credit or ongoing arrears position, then home loan pricing could potentially jump up because of the risk rate. So that could also affect borrowing capacity because the higher the interest rate, it means the higher the assessment rate. So the offer rate as to how lenders assess loan applications, which could ultimately affect the end loan affordability. So if we have that and your loan affordability becomes, say, an arbitrary number of $500,000, but you need $560,000 to complete the financial settlement, that’s going to be an issue.

Kate Russell

I see. So you’re borrowing power might be reduced even if your income is the same. Right. Okay. Yeah, that’s quite serious.

Jyana Papanastasiou

So just to recap, I guess the three critical points to, I guess not meeting home loan repayments by either party are those three things. One being credit rating could be affected. Second thing, it could affect your future ability to borrow at a certain level. And then the third and probably most critical would be foreclosure from the existing mortgagor.

Kate Russell

Alright. So definitely not a position you want to get in if you can avoid that.  And just to go back on what you said earlier, that even if one party has moved out of that property because their contract is actually with the lender, they are still obliged to meet that contractual payment for the mortgage.

Jyana Papanastasiou

That’s right. Yeah, that’s right. And now, obviously, everyone’s individual circumstances are different. And as such, there may be a range of other scenarios or arrangements that potentially a separating couple may have put in place, depending on how amicable, I guess, the separation is. So just to give you an example of something we have seen in the past, (now this is not to say that everyone can go off and make this arrangement, but this is a particular arrangement that this couple put in place) and that was that one of the parties stayed, remained and continued to live in the family home with her two children. And the ex-partner decided to move out or rent a place.

Now, they decided that it was the person living in the home – their responsibility to make loan repayments and also contribute to property expenses. And they’re in the position to do so. So that works for them. And the ex-partner that moved out was going to cover their rent and also pay some child support to assist with ongoing living expenses of the party that remained in the home. Okay. So that was a specific situation that worked for that couple until a financial settlement was reached whereby a refinance was completed, property transfer was affected, and a financial settlement was completed.

Kate Russell

It seems that having that discussion is really important. So not just assuming anything, not just thinking ‘I’m moving out, I don’t have to pay anymore.’ It’s something you really do have to set up with your ex-partner and make sure that everything has been covered.

Jyana Papanastasiou

That’s right, Kate. That’s right. I think a really important point there was not to assume.

Kate Russell

Yeah. So Jyana, you were talking about property settlements. I know that that property settlement might be the sale of the family home, or it could be a settlement where there’s been a refinance and one party has been bought out. So I know that’s a really, really big and emotional decision often to sell the family home. It can be really emotionally charged. We so often have this really deep connection with our home and we’ve built memories there. We have community and especially if you’ve had children where they’ve been born there and they feel safe there, that’s their home. So if I am weighing up the options with my partner or my ex-partner, what do we need to consider if one party really wants to keep the family home in the separation?

Jyana Papanastasiou

Yeah. So there are a couple of probably key considerations to that, and it is a situation of really understanding what could be the likely way forward or the likely outcome for that family home. So if it is you that wishes to keep the family home, it’s not as straightforward as perhaps just taking on the responsibility of the mortgage and then parting ways because it’s likely that your ex-partner is still a co-borrower on that loan and also a co-owner of that property. So

So at that point in time, one’s loan affordability or borrowing capacity needs to come into place. So before a property can be transferred over or a mortgage can be repaid, a new mortgage is established. What needs to happen is we need to run some numbers around loan affordability and borrowing capacity to see whether this scenario is actually doable.

Kate Russell

So you just said there, Jyana, that a new loan is established. So I’m not just swapping the mortgage into my name. I have to actually establish a new loan. Is that right?

Jyana Papanastasiou

That’s right. So a whole new loan application will need to occur at some point if the intention is to retain a family home and obviously either pay out or take on the mortgage. So if that was to happen, then a loan application needs to be put forward to a lender, be it the current lender or a new lender.

Then as part of that process, generally a lawyer is involved whereby they assist with the property transfer. So simultaneously, when the property transfer is affected, then the new mortgage is raised. So it all happens at the same time. But all the planning needs to be put in place prior in order to get to that outcome because as I said earlier, if the loan affordability doesn’t stack up for the person wanting to retain the family home, then it may not be an achievable outcome.

Kate Russell

Right. So you really need to be able to raise that mortgage by yourself, essentially.

Jyana Papanastasiou

That’s right.

Kate Russell

Okay. And so then if that were to occur and I wanted to raise a mortgage myself, do I take just take over the balance of what’s due to be paid, or do we actually need to revalue the house?

Jyana Papanastasiou

Yeah. So as part of the process, I guess, property valuation is a key consideration. And again, it all comes down to what share or equity position is available in the property in order to split that out as agreed by the couple or the separating couple. So what happens generally is a property valuation is completed on the home by an independent property valuer that does a full, thorough evaluation whereby they would assess the current market value of the home. And that figure that’s reported back in a comprehensive property valuation report, that would be the figure that would be relied upon as the sworn valuation or property value. So in that situation, that kind of forms the basis, I guess, to work backwards and arrive to an agreement.

Kate Russell

Okay. So if my partner and I bought a house 15 years ago and we’ve only got a couple of hundred grand left to pay, I can’t just take on an extra 100. We’re going to have to look at it from its current value.

Jyana Papanastasiou

Yeah, that’s right. There’s capital growth, potentially, that property has experienced. So that effectively is sharing the property, that’s equity held in the property, and that is an asset. And so that forms part of the asset pool. So the equity position that’s available in that home is part of the asset pool and is probably one of the largest considerations and assets when it comes to a financial settlement.

So certainly a property valuation is an important part of the process and as part of the application process as well, the lender will also complete its property valuation. Generally, we find the property valuation completed by the independent valuer and the valuation completed by the lender’s panel valuer do align. And in that instance, that becomes what we call also the bank value where a loan amount is raised against. There’s certainly a property evaluation that needs to occur before a refinance is completed.

Kate Russell

And do you see sometimes parties getting their own valuations done or do they generally just use one?

Jyana Papanastasiou

Look, in an amicable separation, generally, they agree to engage one external property valuer. We have seen some circumstances, very few, though, where each party has requested their own property evaluation from independent property value that they’ve chosen to engage. But of course, then there’s extra cost considerations in doing so as well because it can be quite an expensive exercise to engage an external property value.

Kate Russell

Absolutley. And just thinking about the fees of having a property change hands, are there any other fees involved in actually changing the title over just to one person’s name? Do we have to pay stamp duty or are there exemptions?

Jyana Papanastasiou

Yeah, that’s a really good point. So there may be some exemptions that could relate to stamp duty –  it’s a state by state ruling. We would certainly strongly recommend that conversation be held with your lawyer or solicitor when the time comes or as part of planning for a refinance if that’s the avenue that will be taken. So if you’re retaining the family home, that’s something that needs to be discussed from the outset so we can ensure that all costs are built in if there are stamp duty costs involved.

Kate Russell

Okay. And then, of course, you’ve got your legal costs and conveyancing costs of property transfer.

Jyana Papanastasiou

That’s right. So there’s all the ancillary cost that’s going to go along with it. But the major cost, if it’s applicable in most cases, we have seen that it may be avoided and there may be exemptions. But if stamp duty is applicable, then that could be a considerable cost.

Kate Russell

Right. So it sounds like keeping the family home. There are a lot of things to consider. I know everyone’s situation is different, but is it a better option to sell our home and start again?

Jyana Papanastasiou

Yeah. I mean, I wish I had the answer to that for every circumstance. I guess what we can talk about through, though, are the pros and cons of maybe selling the family home and the considerations around that. So again, I must say that everybody’s circumstances are different, so different things impact different decisions and different outcomes. And it’s really important that I know we have thought about this as credit advisers or financial advisers, but it really is important to take every bit of your circumstance into consideration when making these decisions.

So let’s think about, I guess, the cons, or the downside of selling the biggest ones for me. And what we’ve seen in most of our discussions with separating couples and their children is the emotional and the practical impacts of leaving their family home. So I think you touched on this earlier, Kate, and it really is such an important consideration.

Now obviously, the numbers are the numbers, and we would need to work through that. But first and foremost, there are huge emotional connections to a family home or a home that Our children have been born in and they’ve been raised in. So that’s one implication for selling, I guess, and also leaving an area or a community that you or your children have been well established in, I guess, and are very familiar with and comfortable in.

There are other cons as well. So if there is a mortgage on home that needs to be considered. So if you obviously sell at a point in time, then have you realised the full capital uplift of that property? Is that something that’s important to you? Do you feel that that asset will continue to grow in value?

And then there are other things such as cost involved with selling a property. So selling costs can be quite high. When we’re talking about marketing costs and real estate agent costs, that can be anywhere between in sort of two-and-a-half per cent to say three-and-a-half per cent of the property value. So if you’re talking about a $1 million property, the lower end is 2.5%, so you’re talking about at least $25,000 in marketing and selling costs just to a real estate agent that you would be forfeiting so that’s a cost that I guess gets removed from the asset pool if you like.

So it may not be as financially advantageous to sell, but some couples may not be in a situation where the person wanting to stay in the family home can actually refinance the debt if there is any, and retain the home that way.

Kate Russell

And as you said earlier, Jyana, it’s not just refinancing the debt, it’s also raising the capital gain that the property is seeing.

Jyana Papanastasiou

That’s right. For the payout.

Kate Russell

To buy it from your partner, essentially.

Jyana Papanastasiou

Exactly right. And so loan affordability and these early mortgage discussions and early assessment scenarios are absolutely critical to arriving to a financial settlement because it’s really no use in arriving to a financial settlement and then a loan cannot be refinanced and the equity cannot be drawn out because loan affordability is just not there.

So to avoid disappointment, to avoid the added emotional stress to this whole process that is already a stressful situation and, you know, anxiety is heightened in these types of circumstances. But to try and eliminate that and keep the process as smooth as possible, we would always recommend a discussion with either a mortgage broker or a credit advisor or finance specialist to ensure that we’ve checked out these numbers at the front end as to whether can we actually afford or can one party afford to keep the family home by refinancing and drawing out the additional equity required to pay out the partner?

Kate Russell

So make sure you’re really well informed on your options before you make those decisions.

Jyana Papanastsiou

That’s right. Let’s talk about the pros of selling all the positives around that scenario. So I guess the highlight here would be releasing the equity. So what happens there is if a property is taken to market, it’s sold in an open market, it’s sold for its current market value, and the tangible cash component is fully released out of that property.

If there’s any associated debt to that property that is obviously first and foremost repaid, and then any residual on the back of any costs would be up for negotiation as part of a settlement agreement.   But generally, financial services is arrived to before the property is actually sold. So then each share and equity position is clearly noted going into that scenario.

Kate Russell

But you come out of that clear of the debt you shared and in a position to move forward as an individual. Wow. So big decision to maken there. So many things to weigh up, and I can understand how people find that so incredibly hard to decide.

Jyana Papanastasiou

So many moving parts as well o the process, I think Kate as well, which adds extra layers of not so much difficulty, but just challenges.

Kate Russell

Yeah. That complexity is real! So Jyana, I think your point there about making sure you’re informed early on in the proceedings is so key.

Jyana Papanastasiou

And just reach out to a trusted adviser or I know, Kate, your network of people is just incredible. So you would be able to connect the right people to the right service. And I think doing this at the forefront would save the separating couple so much time in understanding their numbers at the front.

Kate Russell

Absolutely. So, Jyana, let’s move on now to that post-separation phase. I’d like to get an idea about what they might face as an individual that they didn’t face as a couple and what might they need to consider.

Jyana Papanastasiou

Yeah. So I guess borrowing as an individual. Whilst the credit requirements aren’t too dissimilar to borrowing jointly as a couple, there are perhaps some further limitations that need to be considered. And ultimately when it comes down to one person borrowing, we find that borrowing capacity is not as high obviously as a joint position because there are two incomes generally in that scenario. And now we’d be talking about one income. So when it comes down to loan affordability, I guess again really important to know your numbers and understand your numbers before making the decision to purchase a property, before even committing to a property purchase and understanding that as part of your planning process, again before signing a contract of sale unconditionally.

So there are factors that impact borrowing capacity and income being one of them, yes. Generally, income is a stable variable for a lot of people. That is if you’re employed or PAYG employee. There are other considerations if you’re a self-employed person. So these two factors will dictate which application path you would take and how your borrowing capacity is assessed. And then on the back of that, there are the liability considerations. So any existing liabilities that are already in place, such as credit card limits, or if there’s any HECS debts or personal loans or car loans, or if there’s any salary sacrificing that’s occurring or no valued leases, these are all variables that could affect your borrowing capacity.

Kate Russell

So as a couple, you’re kind of spreading that risk over two people. But now it’s just all on the one person, is that right?

Jyana Papanastasiou

That’s right. All on one person against the one income, if you like. And then there’s living expenses as well to consider, which is a really important part of loan applications, a really important consideration when it comes to the assessment of a loan, affordability. So living expenses include all your day to day expenses, excluding any mortgage repayments, but also any expenses that relate to dependents. So school fees that are now need to be accounted for under your income alone. Child support could be included if it’s being paid, but it needs to be under a court order and typically, if the child is under the age of twelve, lenders will agree to utilize that as accessible income.

Kate Russell

I was going to ask you about that because you’re talking about income. So are there any other payments like spousal maintenance payments, child support payments, maybe family tax benefits? Are any of those, aside from child support, considered income If I’m applying for a loan?

Jyana Papanastasiou

Yeah, so more often than not, a parent that has dependent children may not be employed on a full-time capacity. So they do have split income types. And whilst there are some strong considerations that need to be taken into account when it comes to an assessment, there certainly are lenders that do take child support, spousal maintenance payments, or family tax benefits into account when applying for a loan. Again, I must say that they are considered income where there are formal arrangements in place. For example, family tax benefit. That’s an easy one that’s generally paid out of Centrelink and there’s a clearly issued letter that would state exactly what that benefit would be. So that’s okay. That’s an easy one to verify. But when it comes to child support payments or spouse or maintenance payments, they need to be verified through, again, a legal document or a court order.

Kate Russell

So, Jyana, those financial arrangements need to be binding arrangements that have been signed off by the court, not just an informal agreement between the parties for the lender to see that as an income stream?

Jyana Papanastasiou

That’s right. To consider them as income, they need to be under that method. Correct. Again, I think I touched on it a little bit earlier. But also, the age of the dependents really plays a part in how the lenders consider that income as well. So if the dependent is inching closer to being an adult, then that income is most likely not going to be used as assessable income for your for the purpose of a loan application.

Kate Russell

Because it has a finite lifespan? Right?

Jyana Papanastasiou

So the younger the child is, the more trans there is for a lender to include that type of income as assessable income.

So lots of moving parts. But this is why we’re here. We don’t expect for an ordinary person to know all of these policies. There’s thousands of lender policies that dictate loan affordability and how we assess loans. That’s why having these conversations earlier are prudent to the process.

Kate Russell

Yeah. And if you’re using that as an income source, that might contribute to your ability to borrow, what about the other way around? If you’re actually in a position where you’re paying support payments to your ex-partner, I assume the lender is going to take that into account when you apply for a loan?

Jyana Papanastasiou

That’s right. They will take that into account. So that would come under living expenses. And those payments would need to be included and factored in as part of declared living expenses when it comes to a loan application. And generally, when a loan application is made to the majority of the lenders, bank statements are generally provided as part of the loan application process. So these deductions, if you like, that are coming out of a bank account for support payments paid to an ex-partner are clearly visible to a lender and will be included as part of ongoing living expenses which may or may not affect affordability at a certain level.

Kate Russell

So Jyana, you talked about the age of children as they become adults. There are a lot of couples who separate when they are older. Perhaps their children have grown up and that is the point in life where they actually do separate. So what if I’m a bit later in my earning life? Maybe I’m in my fifties and I’m in a position where I am really starting again. Will I be able to get a mortgage at that point?

Jyana Papanastasiou

The short answer to that is you can absolutely get a mortgage at that point in your life, again, provided there is the loan affordability that we can demonstrate to a lender. In saying that, later in life obviously means a shorter time frame to retirement and that becomes an important consideration for an applicant that’s perhaps in their fifties, or sixties and an exit strategy generally needs to be provided and put forward to the lender as part of a loan application. So whilst we still have access to 25 or 30-year loan terms for people still in their 50s, potentially even their 60s, we need to have or demonstrate a clear exit or repayment strategy for that loan.

Kate Russell

What kind of exit strategy might you have for your mortgage?

Jyana Papanastasiou

Yeah. So an extra strategy may look like this: you have a considerable amount sitting in super. And once you reach retirement age, you have access to that super. You may choose to make a lump sum reduction on your mortgage at that point in time to effectively clear the balance of the loan and be debt-free at that point in time. So that might be one’s exit strategy in order to reenter the market and have a roof over their head and an asset that they live in.

So an exit strategy effectively is just that: how we would demonstrate to a lender in how you would extinguish or clear this mortgage at a point in time when you transition to retirement.

Kate Russell

So, Jyana, look, the system sounds really complex. As you said, so many moving parts to consider. You talked about getting professional advice. What for you is an ideal scenario where you have professionals assisting someone through this process?

Jyana Papanastasiou

Certainly a complex system that’s to put it quite simply, you’re absolutely right, Kate. And you know, not only that, there’s just a myriad of policies and requirements that need to be met in the current age when it comes to financing. So I would certainly recommend having a discussion with both a mortgage broker and a financial advisor to try and work together with these two professionals whereby the mortgage advice, the mortgage broker can provide all the advice around pre-assessments and borrowing capacities and loan affordability and future scenarios and what all of that could look like based on current income or future income. And then the financial advisor would be best positioned to provide the advice around which way the financial settlement could perhaps go to benefit the couple in that situation. Certainly, a joint conversation would be ideal, but if that’s not something that one has access to, then certainly understanding the basic numbers for the way forward. If retaining the family home is a consideration, then at least a simple conversation with the mortgage broker to understand the position would be recommended.

Kate Russell

Right. And then when you’re really clear on what your options are, what’s your best financial future? And then, of course, you’ll be dealing with your legal representative as well in order to reach that settlement.

Jyana Papanastasiou

That’s right. So the legal professional helps put that in place and affect that financial settlement between the two parties in order to achieve the outcome, obviously, that’s desired.

Kate Russell

Jyana,  thank you so much for joining me today.

Jyana Papanastasiou

Thanks for having me on the podcast, Kate. I really, really do appreciate it. I see so much value to having early conversations around the finance and the financing pieces of a financial settlement. I feel like they are really integral part of the process. And in working with other couples that have come through The Separation Guide, we find that the process has been a lot more streamlined and less stressful when everyone knows where they stand from a finance perspective.

Kate Russell

That’s Jyana Papnastasiou.  Whether you want to stay in your family home or move on after a separation, make sure you’re informed of all your options. As Jyana said, finding out what’s possible early in the process can give you the confidence that you’re making the right decisions. We’re expanding our network to include more mortgage brokers like Jyana to help you through this difficult time.

If you found the information in today’s podcast useful and you’d like to learn more about your options in separation, or you want to be put in touch with professionals to help guide you through, please go to theseparationguide.com.au and complete our 3-minute interactive Q&A. If you know anyone who is affected by the issues we talked about today, please share the podcast.

In the spirit of reconciliation, The Separation Guide acknowledges the traditional custodians of country throughout Australia and their connections to land, sea and community. We pay our respect to their elders past and present and extend that respect to all Aboriginal and Torres Strait Islander peoples today.