Over 70% of the people who take our Q&A tell us they co-own property. When you separate and have a mortgage, it’s important to understand your obligations. If you intend to keep your family home, there are a few things you need to consider.
Who has to pay the mortgage if we break up?
There are often costs involved in setting up a new home and paying rent when you separate. But even if you’ve moved out, you still need to think about covering your part of the mortgage payments.
When you co-own property and are co-borrowers on a mortgage, your contract is between both parties and the lender. You are jointly and severally responsible for meeting your mortgage payments, which means that you are both responsible for the whole loan amount and not just part of the home loan.
What happens if I don’t pay my home loan?
There are a few negative consequences.
Unmet mortgage payments could affect both borrowers’ credit ratings. This could impact any future loan applications, either to refinance your current loan or to buy another property in the future.
If lenders see you as a risk, they could decline your application. Another possibility is that a lender may only offer you a loan with a higher interest rate, reducing your borrowing capacity.
The most severe result of not paying your mortgage is that a lender may foreclose on the loan and sell your property.
Rather than waiting for default notices or foreclosure, Moneysmart.gov.au recommends that you get in touch with your lender and speak to their hardship team as soon as you can to let them know your situation. You may be able to temporarily pause or reduce repayments or rearrange the terms of your loan.
What do I need to discuss with my ex-partner?
Make sure you discuss how you will split your financial obligations to meet your payments. The critical thing is not to assume anything.
Depending on your situation and financial position, you might agree that one person will cover the mortgage in full and the other will cover the rent, or you will split both costs until you settle.
What happens to my loan if I keep my home?
If one of you wants to keep your family home when you separate, there are a few considerations if you have an existing home loan.
It’s not as simple as taking on the existing loan.
If you want to take over a mortgage by yourself, a new loan needs to be established, and a lender will assess your borrowing capacity as an individual. You will then settle your old mortgage and buy out your ex-partner.
Your home needs to be revalued.
Your new mortgage doesn’t just cover what you still owe on your existing loan. It also needs to buy out your ex-partner’s agreed equity share. An independent property valuer will assess the current market value of your home.
You may have other costs to cover.
Legal fees to reach your settlement agreement, valuation and conveyancing, transfer fees, and lender’s mortgage insurance need to be considered. You may also need to cover stamp duty, although there are exemptions for separating couples – check with your solicitor.
What happens if we sell our home?
It can be a tough decision to sell your home. Sometimes this your the best financial option, but it can be a very emotional time.
If you’ve decided to sell, your existing mortgage will be settled, and you and your ex-partner will split any remaining equity according to your financial agreement.
Who should I talk to about my borrowing options?
Whether you intend to refinance and buy out your partner or sell and buy a new property, make sure you check out the numbers early. A great place to start is by speaking with a mortgage broker.
They can assess your situation and look at a range of borrowers to see if your plan is doable. They will also help you understand what counts as income for your application, get pre-approvals and apply for your loan when the time comes.
Find your borrowing options before negotiating your settlement or making any offers on a new property. Knowing where you stand early in the process may save you a lot of stress and heartache later down the track and help you move forward more quickly.